Hey, prior drafts are posted at the time they are first saved, not the time of posting. I'm not sure whether I can work around this or not!
-2outof4
Thursday, February 26, 2009
Wednesday, February 25, 2009
Transparency and Common Sense
There was a lot in President Obama's speech last night. I liked his call for accountability and a balanced budge, and I hope to be able to track the expenditures of the American Recovery and Reinvestment Act Along with all of you at www.recovery.gov.
Why can't this accountability and common sense be applied across the board though? Following Governor Jindal's response I heard a critic say that by refusing some of the support that he did for Louisiana, 25,000 people were not going to receive certain unemployment benefits. There are 4.4 million people in Louisiana! If working through the budgetary issues and making the state self-sustaining means making 0.57% of the population uncomfortable, so be it!
It is the same kind of logic that Howard Dean used defending the Housing bill - foreclosures have really gone up in south Florida and Vegas. No kidding! Those were the speculative hotbeds of the whole country. As the president said, we can work through this, but fiscal common sense and budgetary prudence are musts. It makes no sense to open the checkbook without trying to cut costs and look forward at the same time. You would not buy a new more expensive car without first knowing that you were going to cut back somewhere else, or were receiving a raise in the near future.
Decision making on poor information or to the benefit of a few at the cost of many, will not make the future brighter for our children. Common sense transparent financial planning might!
-2outof4
Why can't this accountability and common sense be applied across the board though? Following Governor Jindal's response I heard a critic say that by refusing some of the support that he did for Louisiana, 25,000 people were not going to receive certain unemployment benefits. There are 4.4 million people in Louisiana! If working through the budgetary issues and making the state self-sustaining means making 0.57% of the population uncomfortable, so be it!
It is the same kind of logic that Howard Dean used defending the Housing bill - foreclosures have really gone up in south Florida and Vegas. No kidding! Those were the speculative hotbeds of the whole country. As the president said, we can work through this, but fiscal common sense and budgetary prudence are musts. It makes no sense to open the checkbook without trying to cut costs and look forward at the same time. You would not buy a new more expensive car without first knowing that you were going to cut back somewhere else, or were receiving a raise in the near future.
Decision making on poor information or to the benefit of a few at the cost of many, will not make the future brighter for our children. Common sense transparent financial planning might!
-2outof4
Why Does College Cost so Much?
There was a lot of talk about education in the President's "almost" State of the Union Address last night. This leads me to a question that I do not think people really take the time to analyze. Why has the cost of education far outpaced inflation over last 20 years or so? The answer is simple in my eyes, and it is the same reason there was such a bubble in the housing market. Cheap money!
Through misguided attempts to make college available to everyone, just like housing, the government has made student lending so readily available and barriers to entry so low, that it is easy for anyone to follow the mantra "go to college, get a better job". Students do not have to think of the debt burden they are taking on because it can be deferred and they can fall back on the old idiom "school debt is good debt". Well, although there is evidence that is the case, there are also plenty of people out there with $50,000 in college debt, working at the local coffee shop, who do not see a light at the end of the tunnel (someone agrees http://online.wsj.com/article/SB123544367541855983.html).
You know me, these people are certainly complicit and I do not feel that bad for them, however, the institutions of higher learning are also complicit, and government needs to act when it and the taxpayers are being taken advantage of. Just like the mortgage lenders, institutions of higher learning will take whatever they can get. If the government is going to provide ample access to student loans, institutions of higher learning are going to take that money and raise prices while they can.
Below is an email note to a gentleman, who took on corruption and ineptitude at the Small Business Administration and tried to illustrate to the public that the government and its easy money was being taken advantage of and outside entities were getting rich in the process. I think my note describes my thoughts on the escalating cost of education and who benefits.
The solution, in my opinion, is that any institution of higher education that receives Title IV funds under the Higher Education Act can not raise tuition at a rate greater than either inflation or the cost of living adjustment in the area of that school. The pool of Title IV funds should also be limited and disbursed on a need basis. The government has the right to limit tuition pricing if it provides the money. Without the government providing loans to students a lot of these institutions would go out of business! It also seems appropriate to tier availability of Title IV funds by economic need. I have not decided whether these policies should be retroactive (i.e. lower tuition levels from their current height), but I would not argue if that's how it was enacted.
Dear Mr.,
(This image stinks, but I believe you can click on it to see it more fully.)
By my calculation and based on this data set, for the 32 years ended 2002, an In State Liberal Arts education at UT increased 10.24% annually, adjusted for inflation. I have read many justifications for this including rising healthcare costs, rising technology costs, rising energy costs, etc. I have no doubt that some of these things may legitimately lead to tuition slightly outpacing inflation. However, by way of an example, the cost of a gallon of gasoline in 1970 versus 2002 in 2002 dollars was $1.66 versus $1.35, respectively. In effect one of the key drivers of energy expense, actually declined over the period of time in question.
So, how has tuition been allowed to rise at such an extortionate rate, relative to the cost of other goods. In my view, it is the same reason that Allied Capitals' crimes against taxpayers persisted and why the "housing bubble" persisted for so long - the government is making the money available to be taken. In the case of higher education, it is politically incorrect to say we need less education, and of course we want an educated society. However, with the proliferation of government backed loans, like the recently increased Stafford loan limits, more people can spend more money on higher education. The easier it is to obtain the money and get it into the hands of the higher education institutions, the more likely these institutions are to hike tuition bills. I believe this is exactly what has been going on for the last 40 years. Given the marginal benefit of some higher education, I believe it is unjust, and a crime against the individuals burdening themselves with this debt as well as the taxpayers who face higher default payments, to continuously raise tuition costs just because politicians constantly make it easier to obtain funding.
We can argue where all of this tuition growth goes at America's "traditional universities", like UT, and whether it is an efficient use of resources. I am sure UT can produce annual reports showing new construction and resources for its students as well as increased salaries, etc. In fact, a quick review looks as though for a budgeted $223 million of net inflows for 2008-09, UT has apportioned all of that out to various entities within the university (http://utdirect.utexas.edu/budget/pdf/UTAustin_Budget_VolI_08-09.pdf). However, at the for-profit-institutions, or publicly listed intuitions as they prefer to be known, it is quite clear where all that money is going - the bottom line.
Therein lies my question, what do you think of the listed institutions of higher learning, like Apollo Group, Inc. (APOL), the parent of The University of Phoenix (UoP) and ITT Educational Services, Inc. (ESI), the parent of such places as ITT Technical Institute? Do you view the recent share movements as a result of the news that the stimulus package may increase Stafford Loan limits an additional $2,000 on top of the $2,000 from this May, as ludicrously as I do, or is it all justified and fools play to stand in front of the growth [reference to short position in the Edu companies stock]?
My simple view is that in regards to the companies above, that APOL is juicing its growth through increased Associates degrees (now over 50% of revenue) and that "persistence" is declining on a TTM basis at ESI while bad debt expense mounts. All the while this NYT article claims the graduation rate at UoP to be 16% http://www.nytimes.com/2007/02/11/education/11phoenix.html. With this kind of graduation rate and the students most likely to be in default, those who do not graduate and those who are in a lower income bracket to begin with, it seems logical that the wheels would come off this money train, if some sort of lending restrictions were put in place. Like ALD though, the Edu lobby is apparently incredibly strong.
There are stories and blogs and newspaper articles all over the web calling into question the value proposition of a UoP, ITT Tech, Strayer, et al. education and it is common knowledge (applauded by the Street) that these places are pros at processing the financial aid forms - APOL is saving cost by renegotiating its outsourced contract for this key cog of its machine. You worked against this kind of thing with ALD and the ineptitude of the SBA. Do you have any insight into how it unwinds? Or does one just have to be patient? (Maybe XXXX has made money on the [stock's] way up.)
I would love to hear any and all thoughts from you regarding the public education companies. To me it is so clear how they are able to prosper and how unjust it seems. But I am willing to admit my view may be misplaced. Politically, it may be difficult to say we do not need to educate everyone, but surely it is not difficult to construct a strict tiering of loan availability based on family income and asset levels, as well as, cap tuition rates at the rate of inflation? No one seems to want to take that stand though.
Thank you for taking the time to read this and again, I would appreciate the thoughts of a man who has done battle with government funded growth machines in the past.
Sincerely,
2outof4
P.S. Despite a 50bps position in APOL, which I had prior to its last update and the recent $2,000 potential increase in Stafford Loan limits, my primary motivation here is social. I cannot stand to see tuition continually and undeniably being lifted and students ladened with increased crushing debt levels for educations of questionable value, all on the tailwinds of a politically safe argument.
This certainly appears to be an area where government means well, but common sense implementation and oversight is extremely poor. I understand that it is driven by the political message that education is good for everyone, just like a home was good for everyone, but at some point it will benefit all of us to look past some of these "tried and true" idioms and ask "why the hell does college cost so much?"
Through misguided attempts to make college available to everyone, just like housing, the government has made student lending so readily available and barriers to entry so low, that it is easy for anyone to follow the mantra "go to college, get a better job". Students do not have to think of the debt burden they are taking on because it can be deferred and they can fall back on the old idiom "school debt is good debt". Well, although there is evidence that is the case, there are also plenty of people out there with $50,000 in college debt, working at the local coffee shop, who do not see a light at the end of the tunnel (someone agrees http://online.wsj.com/article/SB123544367541855983.html).
You know me, these people are certainly complicit and I do not feel that bad for them, however, the institutions of higher learning are also complicit, and government needs to act when it and the taxpayers are being taken advantage of. Just like the mortgage lenders, institutions of higher learning will take whatever they can get. If the government is going to provide ample access to student loans, institutions of higher learning are going to take that money and raise prices while they can.
Below is an email note to a gentleman, who took on corruption and ineptitude at the Small Business Administration and tried to illustrate to the public that the government and its easy money was being taken advantage of and outside entities were getting rich in the process. I think my note describes my thoughts on the escalating cost of education and who benefits.
The solution, in my opinion, is that any institution of higher education that receives Title IV funds under the Higher Education Act can not raise tuition at a rate greater than either inflation or the cost of living adjustment in the area of that school. The pool of Title IV funds should also be limited and disbursed on a need basis. The government has the right to limit tuition pricing if it provides the money. Without the government providing loans to students a lot of these institutions would go out of business! It also seems appropriate to tier availability of Title IV funds by economic need. I have not decided whether these policies should be retroactive (i.e. lower tuition levels from their current height), but I would not argue if that's how it was enacted.
Dear Mr.,
Toward the end of last year I had the pleasure and shock of reading your book, 'Fooling Some of the People All of the Time: A Long Short Story'. Although, it pained me to learn that it would take an unwinding of the leverage bubble to expose this fraud, which enriched itself by manipulating an undermanned and dubiously constructed government entity, I was not totally surprised. As such, I wanted to ask your view on another similar such manipulation and how you see it coming to a head - if ever?
A quick internet search on college tuition compared to inflation, or any derivative of this search, finds several papers, charts, graphs, blogs, etc. on the topic. Below is one interesting data set I found regarding the University of Texas at Austin:
(This image stinks, but I believe you can click on it to see it more fully.)
By my calculation and based on this data set, for the 32 years ended 2002, an In State Liberal Arts education at UT increased 10.24% annually, adjusted for inflation. I have read many justifications for this including rising healthcare costs, rising technology costs, rising energy costs, etc. I have no doubt that some of these things may legitimately lead to tuition slightly outpacing inflation. However, by way of an example, the cost of a gallon of gasoline in 1970 versus 2002 in 2002 dollars was $1.66 versus $1.35, respectively. In effect one of the key drivers of energy expense, actually declined over the period of time in question.
So, how has tuition been allowed to rise at such an extortionate rate, relative to the cost of other goods. In my view, it is the same reason that Allied Capitals' crimes against taxpayers persisted and why the "housing bubble" persisted for so long - the government is making the money available to be taken. In the case of higher education, it is politically incorrect to say we need less education, and of course we want an educated society. However, with the proliferation of government backed loans, like the recently increased Stafford loan limits, more people can spend more money on higher education. The easier it is to obtain the money and get it into the hands of the higher education institutions, the more likely these institutions are to hike tuition bills. I believe this is exactly what has been going on for the last 40 years. Given the marginal benefit of some higher education, I believe it is unjust, and a crime against the individuals burdening themselves with this debt as well as the taxpayers who face higher default payments, to continuously raise tuition costs just because politicians constantly make it easier to obtain funding.
We can argue where all of this tuition growth goes at America's "traditional universities", like UT, and whether it is an efficient use of resources. I am sure UT can produce annual reports showing new construction and resources for its students as well as increased salaries, etc. In fact, a quick review looks as though for a budgeted $223 million of net inflows for 2008-09, UT has apportioned all of that out to various entities within the university (http://utdirect.utexas.edu/budget/pdf/UTAustin_Budget_VolI_08-09.pdf). However, at the for-profit-institutions, or publicly listed intuitions as they prefer to be known, it is quite clear where all that money is going - the bottom line.
Therein lies my question, what do you think of the listed institutions of higher learning, like Apollo Group, Inc. (APOL), the parent of The University of Phoenix (UoP) and ITT Educational Services, Inc. (ESI), the parent of such places as ITT Technical Institute? Do you view the recent share movements as a result of the news that the stimulus package may increase Stafford Loan limits an additional $2,000 on top of the $2,000 from this May, as ludicrously as I do, or is it all justified and fools play to stand in front of the growth [reference to short position in the Edu companies stock]?
My simple view is that in regards to the companies above, that APOL is juicing its growth through increased Associates degrees (now over 50% of revenue) and that "persistence" is declining on a TTM basis at ESI while bad debt expense mounts. All the while this NYT article claims the graduation rate at UoP to be 16% http://www.nytimes.com/2007/02/11/education/11phoenix.html. With this kind of graduation rate and the students most likely to be in default, those who do not graduate and those who are in a lower income bracket to begin with, it seems logical that the wheels would come off this money train, if some sort of lending restrictions were put in place. Like ALD though, the Edu lobby is apparently incredibly strong.
There are stories and blogs and newspaper articles all over the web calling into question the value proposition of a UoP, ITT Tech, Strayer, et al. education and it is common knowledge (applauded by the Street) that these places are pros at processing the financial aid forms - APOL is saving cost by renegotiating its outsourced contract for this key cog of its machine. You worked against this kind of thing with ALD and the ineptitude of the SBA. Do you have any insight into how it unwinds? Or does one just have to be patient? (Maybe XXXX has made money on the [stock's] way up.)
I would love to hear any and all thoughts from you regarding the public education companies. To me it is so clear how they are able to prosper and how unjust it seems. But I am willing to admit my view may be misplaced. Politically, it may be difficult to say we do not need to educate everyone, but surely it is not difficult to construct a strict tiering of loan availability based on family income and asset levels, as well as, cap tuition rates at the rate of inflation? No one seems to want to take that stand though.
Thank you for taking the time to read this and again, I would appreciate the thoughts of a man who has done battle with government funded growth machines in the past.
Sincerely,
2outof4
P.S. Despite a 50bps position in APOL, which I had prior to its last update and the recent $2,000 potential increase in Stafford Loan limits, my primary motivation here is social. I cannot stand to see tuition continually and undeniably being lifted and students ladened with increased crushing debt levels for educations of questionable value, all on the tailwinds of a politically safe argument.
This certainly appears to be an area where government means well, but common sense implementation and oversight is extremely poor. I understand that it is driven by the political message that education is good for everyone, just like a home was good for everyone, but at some point it will benefit all of us to look past some of these "tried and true" idioms and ask "why the hell does college cost so much?"
Stock Interest List Update
This is just a quick update on the Longs list:
SHOO - reported 4Q08 yesterday. The results looked pretty strong, but the guidance was a bit weak. I am reserving judgment on this one until I see a full Statement of Cashflow. It seemed to me as though SHOO chewed through a bit of cash in the quarter and was not the most forthright about that. At this point I am still interseted in the name.
MWW - gathered a few more data points on this one, including the Annual Report being published. Although, the stock certainly looks cheaper (as many do), it did chew through a lot of its cash pile in 4Q. Granted, a lot of that was from acquisition, but given the environment, its not clear how any acquisition will integrate. Also, with the proliferation of competitors, costs were clearly driven up and margins down. I would have more interest in the business if it possessed clearer barriers to entry, but its not clear they really differentiate themselves. Some will say, "but if you were interested at $8.93, surely you must still be interested at $6.75?" With MWW this is not the case. I would prefer to look for companies with stronger business models. The idea that the stock might bounce on an indication or passage of economic stimulus was incorrect. While MWW returned (24.41%) in the time since it was placed on the interest list, the S&P 500 returned (10.99%). I am removing it from the interest list.
-2outof4
SHOO - reported 4Q08 yesterday. The results looked pretty strong, but the guidance was a bit weak. I am reserving judgment on this one until I see a full Statement of Cashflow. It seemed to me as though SHOO chewed through a bit of cash in the quarter and was not the most forthright about that. At this point I am still interseted in the name.
MWW - gathered a few more data points on this one, including the Annual Report being published. Although, the stock certainly looks cheaper (as many do), it did chew through a lot of its cash pile in 4Q. Granted, a lot of that was from acquisition, but given the environment, its not clear how any acquisition will integrate. Also, with the proliferation of competitors, costs were clearly driven up and margins down. I would have more interest in the business if it possessed clearer barriers to entry, but its not clear they really differentiate themselves. Some will say, "but if you were interested at $8.93, surely you must still be interested at $6.75?" With MWW this is not the case. I would prefer to look for companies with stronger business models. The idea that the stock might bounce on an indication or passage of economic stimulus was incorrect. While MWW returned (24.41%) in the time since it was placed on the interest list, the S&P 500 returned (10.99%). I am removing it from the interest list.
-2outof4
Sunday, February 22, 2009
One That Got Away
I hope everyone has been enjoying their weekend. I had a tough experience at work last week. It is commonly referred to as "missing that one". It was not all my fault though. For a variety of (valid) reasons the firm I work for decided not to use my idea, and because I was still trying to convince the powers that be that not listening to me might not be the best course of action, I could not post the idea to the potentially interesting Longs list on this blog.
So I want to offer this as an illustration of one way to think about choosing stocks, and spark discussion on how you look at stocks and investing in general. I also want to offer it as a way for people to ask questions about looking at stocks. It would be cool if over time people felt comfortable asking and discussion questions on the topic, here at 2outof4.
What I describe below is typically referred to as "Value Investing". The premise is that you want to buy the stock of a company that is so cheap, that there is a reasonably large margin of safety the stock does not decline much further even if the company reports a bad quarter or negative near-term news. The catch is the company must be a going concern with reasonable prospects of future growth and/or ability to generate a return on its invested capital.
After the close of the market last weekend (2/13-2/15), I thought I found one such Company. One where it looked reasonably cheap, the ongoing business would be stable even if a portion of the company completely stopped functioning, the returns on company invested capital were high, there was good cash flow generation, and management had managed through downturns in the past. The stock had also happened to have dropped in lockstep with a competitor, who had reported its fourth quarter earnings earlier in January. So in a real sense, the stock of the company I was looking at had already been punished in price for poor earnings, which it had not even reported yet, in the fourth quarter. Therefore, if the Company's 4Q08 earnings after the market close on 2/19 were in line with Wall Street analysts expectations and future guidance was not much worse than already lower expectations, I felt the stock had a reasonable chance to actually go up. I knew from my work on the valuation, that it really shouldn't go down much further.
The name of the company in question is Universal Electronics, Inc. (ticker: UEIC). Essentially, it creates all the infrared code and makes remote controls for a number of cable/satellite providers as well as universal remote controls that are sold in retail (mainly in Europe). Granted, not a great business per se in this economic environment, but I had done some research that told me that at a minimum selling remotes to cable/satellite providers was not a business that was going to disappear soon.
What follows is a write-up of some thoughts on the idea. Please feel free to ask questions because there is some jargon and acronyms that may not make sense. I thought I would prefer to let you ask questions instead of explaining all the minutia in this post, although I would be happy to.
-2outof4
So I want to offer this as an illustration of one way to think about choosing stocks, and spark discussion on how you look at stocks and investing in general. I also want to offer it as a way for people to ask questions about looking at stocks. It would be cool if over time people felt comfortable asking and discussion questions on the topic, here at 2outof4.
What I describe below is typically referred to as "Value Investing". The premise is that you want to buy the stock of a company that is so cheap, that there is a reasonably large margin of safety the stock does not decline much further even if the company reports a bad quarter or negative near-term news. The catch is the company must be a going concern with reasonable prospects of future growth and/or ability to generate a return on its invested capital.
After the close of the market last weekend (2/13-2/15), I thought I found one such Company. One where it looked reasonably cheap, the ongoing business would be stable even if a portion of the company completely stopped functioning, the returns on company invested capital were high, there was good cash flow generation, and management had managed through downturns in the past. The stock had also happened to have dropped in lockstep with a competitor, who had reported its fourth quarter earnings earlier in January. So in a real sense, the stock of the company I was looking at had already been punished in price for poor earnings, which it had not even reported yet, in the fourth quarter. Therefore, if the Company's 4Q08 earnings after the market close on 2/19 were in line with Wall Street analysts expectations and future guidance was not much worse than already lower expectations, I felt the stock had a reasonable chance to actually go up. I knew from my work on the valuation, that it really shouldn't go down much further.
The name of the company in question is Universal Electronics, Inc. (ticker: UEIC). Essentially, it creates all the infrared code and makes remote controls for a number of cable/satellite providers as well as universal remote controls that are sold in retail (mainly in Europe). Granted, not a great business per se in this economic environment, but I had done some research that told me that at a minimum selling remotes to cable/satellite providers was not a business that was going to disappear soon.
What follows is a write-up of some thoughts on the idea. Please feel free to ask questions because there is some jargon and acronyms that may not make sense. I thought I would prefer to let you ask questions instead of explaining all the minutia in this post, although I would be happy to.
"I have been looking at UEIC over the weekend and think it is a good fit as a long idea. I cannot rule out that UEIC pooches the quarter this Thursday, but I want to own a little bit going into results –in case of a less negative-than-expected rally.
UEIC manufacturers remotes controls for OEM, subscription companies, and retail. However, the “Business” segment accounts for 80% of the Company’s revenue, with 70% of the
It seems though, at this valuation, the pooch may be in the numbers. If it is not, then it seems the market is suggesting this company does not make it, despite it weathering a recession in the past and having a seemingly sustainable business within the Business segment. At 0.3x EV/Sales, even if I take the 15 year historical Net Margin % per StockVal of 5.8%, and discount it down to 4%, I still get EV/E of 7.5x on a company where sales and earnings are not expected to blow apart. For reference the average quarterly Net Margin % from March 2001 to June 2003 was 6.8%. In terms of margin of error, the DCF based on terminal FCF of the TTM still gives upside to today’s price on a WACC of 12% (see below)!
UEIC’s market position, potential to grow at home and abroad and experience through prior downturns are the keys to a positive longer term fundamental view. The Company projects that the number of homes that receive digital signals will nearly double to 636 million households or half the world’s TV homes. Accordingly, UEIC has started supplying remotes to Reliance in
3Q08 was a good size miss on sales at Consumer and margin. The Company suggested lower sales and mix as hitting gross margin, but there was likely a little promotion and incentivization, which also hit gross margins. However, sales did increase in 3Q based primarily on digital signal change overs, DVR, VOD and HD change overs all with the subscription broadcast customers. Similarly consumer sales increased due to a new product and a new
In conclusion, this is not a bankruptcy candidate. Margins may come in and UEIC may have to find a base level of business that has a lesser contribution from Consumer. However, It appears to me, the market is pricing in much worse. Just by way of example. If I take TTM sales in the Business segment of $214.4 million and apply the gross margin of 30% and an opex expense rate of 24.9% for the overall business in 3Q08, I calculate net income of $7.9 million. If I use this as a proxy for FCF, assuming D&A and capex cancel each other out, and grow it very slightly I still have upside to today’s price (albeit small and requiring a lowering of my conservatively high WACC above) – that’s assuming consumer goes completely away.
Risks: Retail in Europe plummets, customer concentration, likely need to take inventory scrap reserve up a bit, do a bad deal or merger b/c seem to suggest possibility of an acquisition frequently, certain amount of inventory purchase obligations over the next few years, customers access to credit is huge for these guys, unclear to me how the Company’s library of infrared codes which covers 348kdevice functions and over 3,300 individual consumer electronic equipment brand names is valued on B/S – if at all, supplier concentration, 4Q is biggest quarter, state that most of cost base is currently fixed, US putting off the “digital upgrade”."
-2outof4
Book List Change
Based on my post above regarding value investing, I wanted to add Seth Klarman's 'Margin of Saftey: Risk-Averse Value Investing Strategies for the Thoughtful Investor'.
http://www.amazon.com/Margin-Safety-Risk-Averse-Strategies-Thoughtful/dp/0887305105/ref=sr_1_10?ie=UTF8&s=books&qid=1235345286&sr=8-10
But then I remembered the cost! I had the fortune of borrowing a copy, but don't think I'd be able to track it down if I tried now.
Malcom Gladwell's new book came off, but I'll post something to replace it soon enough.
-2outof4
http://www.amazon.com/Margin-Safety-Risk-Averse-Strategies-Thoughtful/dp/0887305105/ref=sr_1_10?ie=UTF8&s=books&qid=1235345286&sr=8-10
But then I remembered the cost! I had the fortune of borrowing a copy, but don't think I'd be able to track it down if I tried now.
Malcom Gladwell's new book came off, but I'll post something to replace it soon enough.
-2outof4
Report from I-95
I am happy to report that the rest stops along the Northeast Corridor of I-95 are full and the bars are still packed with Yuppies and politicos. (Also, there's a little less Guinness at said watering holes.)
It was nice to see that life is going on and that maybe I shouldn't let the drone of CNBC on a daily basis get me so blue.
Cheers!
-2outof4
It was nice to see that life is going on and that maybe I shouldn't let the drone of CNBC on a daily basis get me so blue.
Cheers!
-2outof4
Friday, February 20, 2009
Technical Blog Question
Does anyone out there know how to post documents - Word, PDF, Excel - to the blog?
Videos and images are self-explanatory, but I don't see a way to load documents. Oops, didn't see that gully!?!
Videos and images are self-explanatory, but I don't see a way to load documents. Oops, didn't see that gully!?!
Thursday, February 19, 2009
Let's Assess Foreclosures - Anecdotes Wanted
You all pretty much know my thoughts surrounding the housing market. Not too different to the Ricker's:
http://www.cnbc.com/id/15840232?video=1039849853
Here is the outline of the plan straight from the White House followed by a simplified illustration:
http://graphics8.nytimes.com/packages/pdf/politics/20090218factsheet.pdf
http://www.nytimes.com/interactive/2009/02/18/business/0218-housing-graphic.htmlI bet you think by now I'm going to say the whole thing is hooey. Well, I had written out how I can get behind the first item of the plan somewhat, but then had to reconsider. There is a reason those loans are being refied onto Fannie's books - no bank wants that default risk!
As for the other elements of the Homeowner Affordability and Stability Plan, I cannot really budge either. Markets happen!
But let me introduce another idea. This plight of foreclosures is an exaggeration of both Pols and the media. Can you tell me of anyone you know or know of, who lives in a "mature" neighborhood that has experienced price deterioration of his or her home beyond the general decline in the market as a result of a neighboring foreclosure(s)? Let's define mature as existing prior to 2000. I have not heard or seen one such complaint, but would be curious to hear examples of such phenomena.
At the end of the day, you cannot start to convince me that the "mortgage crisis" is an issue that the normal buying and selling of a market cannot solve, until we see a meaningful increase in foreclosure related price declines in these mature neighborhoods. This does not mean there will not be foreclosures in these neighborhoods, but I think most buyers will treat those distressed prices as one-off, rather than setting the bar for future sales.
It looks as though this plan is locked and loaded, so like the Stimulus, I hope it accomplishes even more than expected! The issue is different than nitpicking around the Stimulus though, I just think the solution here is simple - don't do anything because it is unnecessary and supports bad/stupid behavior. If you need proof just watch the CNBC documentary, House of Cards, and focus on the interior of each interviewee's house. Not everyone needs to live in the Pottery Barn showroom and have a pool!
-2outof4
Who Do You Blame?
As usual, if someone sends me an article that I think is clearly written and more articulate than me, I'll gladly post it. And as it happens, two brothers, unbeknownst to each other, sent me two great articles in the same vein.
Generally, this guy is too gloomy for me (see the name of his report), but this gives a good chronology of how easy money affected the globe:
http://online.wsj.com/article/SB123491436689503909.html
Contrary to popular belief, I do not blame all the woes of the world on Vinny Cerrato. Based on the above, I gotta take the Maestro in this vote:
http://www.time.com/time/specials/packages/article/0,28804,1877351_1877350,00.html
-2outof4
Generally, this guy is too gloomy for me (see the name of his report), but this gives a good chronology of how easy money affected the globe:
http://online.wsj.com/article/SB123491436689503909.html
Contrary to popular belief, I do not blame all the woes of the world on Vinny Cerrato. Based on the above, I gotta take the Maestro in this vote:
http://www.time.com/time/specials/packages/article/0,28804,1877351_1877350,00.html
-2outof4
Wednesday, February 18, 2009
When Is 20% Good Enough?
There have been some good questions regarding the stimulus bill, which was signed into law by President Obama yesterday.
A lot of the programs being supported are fine programs, and in most cases, programs that non-governmental investors would not support. As I have said before, I believe providing these kind of services/programs that benefit the common good is one of the basic precepts of government. However, the stimulus was pitched as a creator of 3.5-4.0 million jobs, then changed to a saver or creator of 3.5 million jobs. I am left questioning both the messaging and eventual effectiveness of the package. I think one of the first things you learn when you get to Washington is to stay on message, and the stimulus message looks a bit lost.
I went through each allocation of the stimulus, in a fairly lenient manner, and came up with 21.5% of the $790 million spending package that would fund a project likely to create a new, albeit short-lived, position and/or build something that would continue to add value. For example, it is hard to argue that the Tennessee Valley Authority did not create lasting value and at least a partial foundation for future growth. Of course there are probably some that I missed, but also some that I should not have counted, so net net I feel good about my figure. The majority of the personal tax cuts I did not count. The reason being that I just do not see tax refunds being spent on new goods and services (i.e. the money moving through the economy). The savings rate is up and in this environment I think it will only increase.
It is not the stimulus per se that I oppose. I advocate the least amount of intevention as possible and believe that just as things were exaggerated to the upside (with everyone on the road in a Beamer), they are being exaggerated to the downside as well (everyone in your neighborhood is going to be foreclosed on). In the current situation we would be better off in the long-term if we take some lumps now and reset expectations on a more normal rate of growth, rather than the cheap money induced rate of the last seven years. Recession is a good excuse to spend, and I get that, but I do not like to hear job creation in one ear and hear straight welfare and special interest pandering in the other.
As it is now law, I hope the stimulus works to spur real growth and job creation, but I have my doubts. I would like to prattle on about being smart with the money, as the President promised he would be with his oversight committees, but in a sense there is no point. It is now up to Americans to earn our way out of this hole, and at a reasonable time start on the path to fiscal prudence with targets and progress reports toward balanced budgets.
-2outof4
A lot of the programs being supported are fine programs, and in most cases, programs that non-governmental investors would not support. As I have said before, I believe providing these kind of services/programs that benefit the common good is one of the basic precepts of government. However, the stimulus was pitched as a creator of 3.5-4.0 million jobs, then changed to a saver or creator of 3.5 million jobs. I am left questioning both the messaging and eventual effectiveness of the package. I think one of the first things you learn when you get to Washington is to stay on message, and the stimulus message looks a bit lost.
I went through each allocation of the stimulus, in a fairly lenient manner, and came up with 21.5% of the $790 million spending package that would fund a project likely to create a new, albeit short-lived, position and/or build something that would continue to add value. For example, it is hard to argue that the Tennessee Valley Authority did not create lasting value and at least a partial foundation for future growth. Of course there are probably some that I missed, but also some that I should not have counted, so net net I feel good about my figure. The majority of the personal tax cuts I did not count. The reason being that I just do not see tax refunds being spent on new goods and services (i.e. the money moving through the economy). The savings rate is up and in this environment I think it will only increase.
It is not the stimulus per se that I oppose. I advocate the least amount of intevention as possible and believe that just as things were exaggerated to the upside (with everyone on the road in a Beamer), they are being exaggerated to the downside as well (everyone in your neighborhood is going to be foreclosed on). In the current situation we would be better off in the long-term if we take some lumps now and reset expectations on a more normal rate of growth, rather than the cheap money induced rate of the last seven years. Recession is a good excuse to spend, and I get that, but I do not like to hear job creation in one ear and hear straight welfare and special interest pandering in the other.
As it is now law, I hope the stimulus works to spur real growth and job creation, but I have my doubts. I would like to prattle on about being smart with the money, as the President promised he would be with his oversight committees, but in a sense there is no point. It is now up to Americans to earn our way out of this hole, and at a reasonable time start on the path to fiscal prudence with targets and progress reports toward balanced budgets.
-2outof4
Monday, February 16, 2009
Hey, Mayor Nutter Likes Libraries Too
Not only did my father-in-law give me a great 'Tractor Supply Company" (see Stocks sidebar) baseball hat this weekend, he gave me this article regarding the fair city of Philadelphia's embattled mayor, Mayor Michael Nutter:
http://www.economist.com/world/unitedstates/displaystory.cfm?story_id=13109707&fsrc=rss
This story and stories like the one that appeared recently in Philadelphia Weekly, (http://www.philadelphiaweekly.com/articles/18160/cover-story) featuring Mayor Nutter being crucified, seem to embody what is happening on the national level.
In a tough economy, a few loud interest groups tugging on constituents heartstrings are mobilizing support for programs that there simply is not money to support. Do you really think Mayor Nutter wants to close libraries? No, but unlike his compatriots in Washington, he does not have the ability to guarantee reelection by printing money and bankrupting the City. He must actually balance a budget. So instead of whining about things that obviously need to be worked on and compromised on, maybe Philadelphians should and come up with a plan.
The solution on this one is relatively easy. People do not primarily go to the library for books anymore. They go to use the Internet - email, job postings, advertisements, etc. They go for a place to work and study. They go to chat and feel part of the community. In the end the library is an extension of the neighborhood. The thing is, Philadelphia's Free Library system is a series of cathedrals to books and knowledge, especially the grand Central Philly Fee Library http://libwww.freelibrary.org/branches/brnlist.cfm. By my count, 54 libraries for a metro area is a lot of libraries. Philly does not need 54 cathedrals.
Simply keep three to five of the biggest branches in their traditional form - giant book depositories. Sell the other branches - all of them. With the proceeds, buy or lease two to three room spaces, for the purposes of this post we will call them "Study Centers" (SC's), in most or all of the neighborhoods that lost their cathedrals. Where neighborhood space is a concern, the Free Library system could leaseback space in the buildings it sold, if that is necessary.
The point is the SC's will have a lower maintenance cost (energy, employees, books) because they will be so much smaller and bookless. Each SC will have more computer terminals than the old cathedrals, and will also have study tables and chairs where residents can work and congregate. Each SC will also have a manned desk where people can request books be delivered (this could be accomplished from over the Internet as well). The Free Library system already has a well run request and delivery system within its current branch system. That way the library system will be run more like Amazon.com's node model than the current dispersed expensive model, but the access to books will not be lost.
In the end, Mayor Nutter and the City will likely save more than the currently planned $8 million, they may make money, residents will have the community centers they fear losing, and Philly will be one step closer to balancing the budget. Stop whining and come up with some fiscally responsible alternatives!
The federal government needs its version of the SC's and Americans need to understand, just like Philadelphians, that getting through this economic slowdown is going to take fiscal thought and compromise. But like Mayor Nutter, the folks in Washington should not take their eyes of the budget. Unfortunately, it is getting more difficult to convince me that they have not.
-2outof4
http://www.economist.com/world/unitedstates/displaystory.cfm?story_id=13109707&fsrc=rss
This story and stories like the one that appeared recently in Philadelphia Weekly, (http://www.philadelphiaweekly.com/articles/18160/cover-story) featuring Mayor Nutter being crucified, seem to embody what is happening on the national level.
In a tough economy, a few loud interest groups tugging on constituents heartstrings are mobilizing support for programs that there simply is not money to support. Do you really think Mayor Nutter wants to close libraries? No, but unlike his compatriots in Washington, he does not have the ability to guarantee reelection by printing money and bankrupting the City. He must actually balance a budget. So instead of whining about things that obviously need to be worked on and compromised on, maybe Philadelphians should and come up with a plan.
The solution on this one is relatively easy. People do not primarily go to the library for books anymore. They go to use the Internet - email, job postings, advertisements, etc. They go for a place to work and study. They go to chat and feel part of the community. In the end the library is an extension of the neighborhood. The thing is, Philadelphia's Free Library system is a series of cathedrals to books and knowledge, especially the grand Central Philly Fee Library http://libwww.freelibrary.org/branches/brnlist.cfm. By my count, 54 libraries for a metro area is a lot of libraries. Philly does not need 54 cathedrals.
Simply keep three to five of the biggest branches in their traditional form - giant book depositories. Sell the other branches - all of them. With the proceeds, buy or lease two to three room spaces, for the purposes of this post we will call them "Study Centers" (SC's), in most or all of the neighborhoods that lost their cathedrals. Where neighborhood space is a concern, the Free Library system could leaseback space in the buildings it sold, if that is necessary.
The point is the SC's will have a lower maintenance cost (energy, employees, books) because they will be so much smaller and bookless. Each SC will have more computer terminals than the old cathedrals, and will also have study tables and chairs where residents can work and congregate. Each SC will also have a manned desk where people can request books be delivered (this could be accomplished from over the Internet as well). The Free Library system already has a well run request and delivery system within its current branch system. That way the library system will be run more like Amazon.com's node model than the current dispersed expensive model, but the access to books will not be lost.
In the end, Mayor Nutter and the City will likely save more than the currently planned $8 million, they may make money, residents will have the community centers they fear losing, and Philly will be one step closer to balancing the budget. Stop whining and come up with some fiscally responsible alternatives!
The federal government needs its version of the SC's and Americans need to understand, just like Philadelphians, that getting through this economic slowdown is going to take fiscal thought and compromise. But like Mayor Nutter, the folks in Washington should not take their eyes of the budget. Unfortunately, it is getting more difficult to convince me that they have not.
-2outof4
I Assume Charlie Thinks this is a Joke
Charlie Munger is Warren Buffet's long-time partner at Berkshire Hathaway. He penned the op-ed below, as was passed to me by my friend in Nashville. My read is that Mr. Munger supports the stimulus, although like me, he seems to focus more on how the heck to pay for it by the end of the letter.
http://www.washingtonpost.com/wp-dyn/content/article/2009/02/10/AR2009021003122.html
Despite Charlie's somewhat unsupported view of the stimulus, I am not sure what he had in mind was Rohm Emmanuel's view of the "message" below:
http://online.wsj.com/article/SB123449249590080699.html
I especially like the paragraph that says:
"In three weeks, the president has secured what Mr. Emanuel called the most sweeping single piece of economic legislation ever, extended health insurance to 11 million children, righted a clear wrong by making it easier for women to sue for wage discrimination, and reoriented U.S. foreign and environmental policy with his orders to close the prison at Guantanamo Bay, Cuba, end torture, and allow states to pursue higher fuel economy standards to combat climate change."
Really?!? Really Administration?!? Really?!? I have no problem with the points Mr. Emanuel supports above, but how by any stretch of the imagination these things go to creating the hoped for 3.5 million jobs, I have no idea! I have not wanted to go here, but it sounds like most of the "stimulus" is going toward Mr. Emanuel, et al's overall policy agenda and not toward true stimulus and the 3.5 million jobs.
Call a spade a spade. Ultimately, history will judge the decisions made today by the effect they have on future generations. With no plan to pay for it by either less spending or higher revenues (i.e. taxes), this is not a stimulus to create jobs, it is a short-term attempt to appease whatever special interests can get their hands in the cookie jar - and at this point it seems there are a lot of hands!
This is just a link to the stimulus package to see for yourself where the money is going. I hope to itemize and report back with what I think may actually be stimulus:
http://online.wsj.com/article/SB123458384689487271.html
-2outof4
http://www.washingtonpost.com/wp-dyn/content/article/2009/02/10/AR2009021003122.html
Despite Charlie's somewhat unsupported view of the stimulus, I am not sure what he had in mind was Rohm Emmanuel's view of the "message" below:
http://online.wsj.com/article/SB123449249590080699.html
I especially like the paragraph that says:
"In three weeks, the president has secured what Mr. Emanuel called the most sweeping single piece of economic legislation ever, extended health insurance to 11 million children, righted a clear wrong by making it easier for women to sue for wage discrimination, and reoriented U.S. foreign and environmental policy with his orders to close the prison at Guantanamo Bay, Cuba, end torture, and allow states to pursue higher fuel economy standards to combat climate change."
Really?!? Really Administration?!? Really?!? I have no problem with the points Mr. Emanuel supports above, but how by any stretch of the imagination these things go to creating the hoped for 3.5 million jobs, I have no idea! I have not wanted to go here, but it sounds like most of the "stimulus" is going toward Mr. Emanuel, et al's overall policy agenda and not toward true stimulus and the 3.5 million jobs.
Call a spade a spade. Ultimately, history will judge the decisions made today by the effect they have on future generations. With no plan to pay for it by either less spending or higher revenues (i.e. taxes), this is not a stimulus to create jobs, it is a short-term attempt to appease whatever special interests can get their hands in the cookie jar - and at this point it seems there are a lot of hands!
This is just a link to the stimulus package to see for yourself where the money is going. I hope to itemize and report back with what I think may actually be stimulus:
http://online.wsj.com/article/SB123458384689487271.html
-2outof4
Friday, February 13, 2009
3.5 Million Jobs - Really?
With the proposed stimuli, just about through the House, I am not sure I see it.
This a blurb from a Wall Street bank regarding the Stimulus. (When I see something, that sums up my views well, I will use it - even if it sums up opposing views, I will use it.) AMT stands for Alternative Minimum Tax:
"Fiscal stimulus may provide some support for various sectors, like broadband, telecom, e-health and asphalt, but there is really less in the package than meets the eye. For all the talk about “infrastructure”, only $150 billion of the $789.5 bln plan is targeted for such. Go figure. The $54 bln aid for the states barely cuts into more than half of next year’s expected fiscal shortfall. The tax breaks do not involve changes to tax rates that elicit permanent changes to spending behavior – $400 individual tax breaks are going to likely exert as much of a tepid impact as last year’s rebates. Tax breaks for housing and auto buying leave us less than inspired. Temporary relief from the AMT is something we see every year – but is still seen as “stimulus”. Jobless benefit extension will help buy food and assist people to meet their rental and utility bills, but we fail to see how the recession ends with these measures. Note that the White House began to leak out proposals for mortgage loan modification – a new program to subsidize mortgage payments for troubled homeowners who have gone through a standardized reappraisal and affordability test – these tests would occur before the borrower becomes delinquent. That is the new wrinkle."
-2outof4
This a blurb from a Wall Street bank regarding the Stimulus. (When I see something, that sums up my views well, I will use it - even if it sums up opposing views, I will use it.) AMT stands for Alternative Minimum Tax:
"Fiscal stimulus may provide some support for various sectors, like broadband, telecom, e-health and asphalt, but there is really less in the package than meets the eye. For all the talk about “infrastructure”, only $150 billion of the $789.5 bln plan is targeted for such. Go figure. The $54 bln aid for the states barely cuts into more than half of next year’s expected fiscal shortfall. The tax breaks do not involve changes to tax rates that elicit permanent changes to spending behavior – $400 individual tax breaks are going to likely exert as much of a tepid impact as last year’s rebates. Tax breaks for housing and auto buying leave us less than inspired. Temporary relief from the AMT is something we see every year – but is still seen as “stimulus”. Jobless benefit extension will help buy food and assist people to meet their rental and utility bills, but we fail to see how the recession ends with these measures. Note that the White House began to leak out proposals for mortgage loan modification – a new program to subsidize mortgage payments for troubled homeowners who have gone through a standardized reappraisal and affordability test – these tests would occur before the borrower becomes delinquent. That is the new wrinkle."
-2outof4
Where Do We Keep Our Money?
Well, besides under the bed and in a big whole in the backyard, other readers and I are curious what tools you use to save money? With the increase in FDIC insurance through 2009 (I see this sticking longer than that), most can feel comfortable with their funds in bank accounts.
One such place that I have used since 2003 is ING Direct (http://www.ingdirect.com/). It is very user friendly (see interactions in plain English rather than legalese), they offer CD's, no hassle loans, mutual fund options (through the online broker they bought called Sharebuilder.com), and because it is linked to your regular checking account you have to think about removing money (i.e., little harder to get to, so more likely to save), and you can open as many accounts as you want under the same username. This last function lets you set up different accounts for specific purposes like 'House', 'Vacation', 'Mrs. 2outof4's Schooling'. The rates are low now, but they are higher than your regular bank because ING Direct has so much less overhead cost - being all online.
This is just a brief summary of why I like ING. But feel free to share your views and other savings tools that you use.
We'll save the discussion for Gold and Silver as inflation hedges for another day - but with it looking like the Senate's version of the Stimulus bill about to pass through the House, that post will come!
-2outof4
One such place that I have used since 2003 is ING Direct (http://www.ingdirect.com/). It is very user friendly (see interactions in plain English rather than legalese), they offer CD's, no hassle loans, mutual fund options (through the online broker they bought called Sharebuilder.com), and because it is linked to your regular checking account you have to think about removing money (i.e., little harder to get to, so more likely to save), and you can open as many accounts as you want under the same username. This last function lets you set up different accounts for specific purposes like 'House', 'Vacation', 'Mrs. 2outof4's Schooling'. The rates are low now, but they are higher than your regular bank because ING Direct has so much less overhead cost - being all online.
This is just a brief summary of why I like ING. But feel free to share your views and other savings tools that you use.
We'll save the discussion for Gold and Silver as inflation hedges for another day - but with it looking like the Senate's version of the Stimulus bill about to pass through the House, that post will come!
-2outof4
Mortgages, Not Quite as Cheap As Cuervo!
Well, I was at a restaurant last night that offered three shots of Jose Cuervo for $7 - total! It is nice to know that if I get laid off at least I can still find a way to forget the problems of the economy.
After Treasury Secretary Geitner's non roll out of his plan earlier this week and the lack of definitive stimulus bill from Congress, we seem to be in a state of flux, with little bits and pieces being leaked out here and there. Governmental planning seems to be as strong as the S&P, which is down 4.4% for the week and 8.1% year to date.
The main issue is confidence and jobs. If we have those, we should be able to turn the ship around regardless of the ups and downs of the housing market. I just do not see how things like this article really help or are a good use of public funds:
http://www.washingtonpost.com/wp-dyn/content/article/2009/02/12/AR2009021203368.html?wprss=rss_politics
Sure, you keep someone in his/her house because of a lower payment, but the bank will still have to write down the mortgage if this person tries to move, and he or she will not all of a sudden make money on an underwater mortgage. In other words, the loss of wealth is still the same, it is just delayed.
In the meantime, the 50% split of the lower payment with the government is just another government pass through to the banks, who made the stupid loan in the first place. This program just puts off the inevitable and I don't think it spurs the economy. It is like the powers that be are just trying to re-inflate the bubble without thinking through to the next step. Frankly, the lack of willingness by most everyone to deal with this issue squarely is becoming tiresome, and I believe there is huge opportunity for some one to be honest with the public. (See Senator Gregg's decision not to accept Commerce Secretary based on his "individuality".)
At the same time plans like this are laid out there is no discussion of what we do to pay that money back. Government intervention into the housing market will only slow down markets running their course. It just seems nonsensical to me. We can say but otherwise the banking system is insolvent. Again, that just seems to say let's keep Citi and Bank of America around because they have been around. Let them go! Have the government make it a smooth transition, but let them go.
Is there an argument here that I am missing? It looks as though we are determined to mismanage it and continue this culture of tying people to homes. Who cares if your mortgage went from $1600 to $1100, when you cannot really aford more than $900. I read this morning in Fred Hickey's 'The High Tech Strategist' (its not just about tech and I highly recommend a subscription) that 25-35 year olds over the last few years spent 117% of their incomes. That and easy money is the issue, and it looks like the charade will continue. It seems like saving the money on housing and directing it toward the rest of the social initiatives coming our way is a better use of funds -at least a a few hundred billion less.
-2outof4
After Treasury Secretary Geitner's non roll out of his plan earlier this week and the lack of definitive stimulus bill from Congress, we seem to be in a state of flux, with little bits and pieces being leaked out here and there. Governmental planning seems to be as strong as the S&P, which is down 4.4% for the week and 8.1% year to date.
The main issue is confidence and jobs. If we have those, we should be able to turn the ship around regardless of the ups and downs of the housing market. I just do not see how things like this article really help or are a good use of public funds:
http://www.washingtonpost.com/wp-dyn/content/article/2009/02/12/AR2009021203368.html?wprss=rss_politics
Sure, you keep someone in his/her house because of a lower payment, but the bank will still have to write down the mortgage if this person tries to move, and he or she will not all of a sudden make money on an underwater mortgage. In other words, the loss of wealth is still the same, it is just delayed.
In the meantime, the 50% split of the lower payment with the government is just another government pass through to the banks, who made the stupid loan in the first place. This program just puts off the inevitable and I don't think it spurs the economy. It is like the powers that be are just trying to re-inflate the bubble without thinking through to the next step. Frankly, the lack of willingness by most everyone to deal with this issue squarely is becoming tiresome, and I believe there is huge opportunity for some one to be honest with the public. (See Senator Gregg's decision not to accept Commerce Secretary based on his "individuality".)
At the same time plans like this are laid out there is no discussion of what we do to pay that money back. Government intervention into the housing market will only slow down markets running their course. It just seems nonsensical to me. We can say but otherwise the banking system is insolvent. Again, that just seems to say let's keep Citi and Bank of America around because they have been around. Let them go! Have the government make it a smooth transition, but let them go.
Is there an argument here that I am missing? It looks as though we are determined to mismanage it and continue this culture of tying people to homes. Who cares if your mortgage went from $1600 to $1100, when you cannot really aford more than $900. I read this morning in Fred Hickey's 'The High Tech Strategist' (its not just about tech and I highly recommend a subscription) that 25-35 year olds over the last few years spent 117% of their incomes. That and easy money is the issue, and it looks like the charade will continue. It seems like saving the money on housing and directing it toward the rest of the social initiatives coming our way is a better use of funds -at least a a few hundred billion less.
-2outof4
Wednesday, February 11, 2009
Show Them the Money
Good morning. Although I stand by my idea to start unloading the banking system's mortgage debt from yesterday, I met with a Wall Street strategist yesterday and I think the scale must be a lot larger than I was discussing.
This guy's numbers were that there are $7 trillion in loans on bank balance sheets and he estimates approximately $1 trillion in losses that need to be taken on tangible equity of between $200 and $300 billion. With a third of the $1 trillion being first lien mortgages, those alone would knock out the $250 million in equity and render the banking system technically insolvent, so my piddly plan doesn't do much! However, I am not Dr. Roubini, or Dr. Doom as he is known, I have an alternative.
The plan should still be to open up the books and get to work! Most of our Congressmen are as suited to deal with a financial crisis as Joe the Plumber. So, I do not blame them directly for not finding solutions. They have no idea what they are dealing with and their incentive system is as screwed up and short-term as the bankers that were putting all this junk together in the first place. Congressmen are worried about short-term reelection and campaign contributions far more than how their grandchildren will repay the impending debt. So instead of calling all the bank CEO's to Washington to embarrass them in hearings about prior misgivings (scheduled for today), how about calling them to Washington to work on a solution!
Let's bring all the banks, all the pols, and any willing and able private investors together and open up the books! Use the DC armory or Verizon Center and sit all these people down and have some price discovery. The government can do its job, providing goods and services that others are not incentivized to, and start facilitating the movement of assets from weak hands to strong hands. In the process, if a few banks go under, so be it. These clowns have had long enough. It will not take a Sunday afternoon and there will not be immediate shock and awe so the markets rally and constituents feel better. Instead, there will be months of price discovery and auctioneering back and forth between strong and weak banks as well as strong private investors and weak banks. The government's roll is to facilitate all of this and backstop depositors at the weak banks - in order to maintain Main Street confidence.
Technically we could accomplish this by creating a database to put all the debt paper into and then screen for attractiveness and valuation purposes - admittedly not an easy thing to program. (And if we cannot today, then get a team of software engineers in a room and get to work.) The strong hands then make a bid and the weak hands are forced to take it. The tangible equity of the banking sector appears negative right now, but we will support it with private equity and equity of any remaining strong banks. The government will facilitate the transition that has not happened because everything has been kept so opaque.
The banks have not been interested in writing this crap down (they have their own separate short-term incentives just like the pols), so they need to be forced to by the government in order to force a bottom and restart of lending (from strong institutions) without government help. I believe this is possible. And I believe it is possible without spending $3 trillion and seeing what sticks. The people in charge just need to make the hard decisions and actually put some work into it rather than conducting any more Sunday afternoon hatchet jobs made to placate various constituents and temporarily makes us feel good!
-2outof4
This guy's numbers were that there are $7 trillion in loans on bank balance sheets and he estimates approximately $1 trillion in losses that need to be taken on tangible equity of between $200 and $300 billion. With a third of the $1 trillion being first lien mortgages, those alone would knock out the $250 million in equity and render the banking system technically insolvent, so my piddly plan doesn't do much! However, I am not Dr. Roubini, or Dr. Doom as he is known, I have an alternative.
The plan should still be to open up the books and get to work! Most of our Congressmen are as suited to deal with a financial crisis as Joe the Plumber. So, I do not blame them directly for not finding solutions. They have no idea what they are dealing with and their incentive system is as screwed up and short-term as the bankers that were putting all this junk together in the first place. Congressmen are worried about short-term reelection and campaign contributions far more than how their grandchildren will repay the impending debt. So instead of calling all the bank CEO's to Washington to embarrass them in hearings about prior misgivings (scheduled for today), how about calling them to Washington to work on a solution!
Let's bring all the banks, all the pols, and any willing and able private investors together and open up the books! Use the DC armory or Verizon Center and sit all these people down and have some price discovery. The government can do its job, providing goods and services that others are not incentivized to, and start facilitating the movement of assets from weak hands to strong hands. In the process, if a few banks go under, so be it. These clowns have had long enough. It will not take a Sunday afternoon and there will not be immediate shock and awe so the markets rally and constituents feel better. Instead, there will be months of price discovery and auctioneering back and forth between strong and weak banks as well as strong private investors and weak banks. The government's roll is to facilitate all of this and backstop depositors at the weak banks - in order to maintain Main Street confidence.
Technically we could accomplish this by creating a database to put all the debt paper into and then screen for attractiveness and valuation purposes - admittedly not an easy thing to program. (And if we cannot today, then get a team of software engineers in a room and get to work.) The strong hands then make a bid and the weak hands are forced to take it. The tangible equity of the banking sector appears negative right now, but we will support it with private equity and equity of any remaining strong banks. The government will facilitate the transition that has not happened because everything has been kept so opaque.
The banks have not been interested in writing this crap down (they have their own separate short-term incentives just like the pols), so they need to be forced to by the government in order to force a bottom and restart of lending (from strong institutions) without government help. I believe this is possible. And I believe it is possible without spending $3 trillion and seeing what sticks. The people in charge just need to make the hard decisions and actually put some work into it rather than conducting any more Sunday afternoon hatchet jobs made to placate various constituents and temporarily makes us feel good!
-2outof4
Tuesday, February 10, 2009
One Possible Housing Solution...
...or at least an assist.
This friend is in the business, with a trusted partner, of purchasing foreclosed houses that need renovating, renovating them and then reselling them. Sound familiar? I'm not talking about the housing flipping shows of 12 months ago. The catch is that he is buying them at auction (often below tax assessment), so his downside is limited. Then he is selling them to buyers who banks would not loan to! How does he do this?
The home purchaser, who for whatever reason did not have the credit to qualify for a mortgage, pays my friend a rent payment, a portion of which is set a side as future equity in the home. At the end of two years, if the purchaser is up to date on all his or her "rent" payments, a bank will offer that person a mortgage on normal terms. At that time, my friend is paid out by the bank for his initial investment and makes a profit on the difference between what he purchased the house for and what he added to it and the amount for which it ultimately sold.
The bank is willing to deal with the purchaser because he or she has proven his or her credit issues are in the past. The bank is willing to give my friend the initial mortgage because of assets he has to secure them but also because of the prices paid for the homes (lower risk). This is just a case of an entrepreneur going to a local bank and the two parties sitting down and working with each other in good faith. One of the roots of American entrepreneurship!
A lot of these community banks exist and have capital to deploy. A lot of private investors exist and have capital to deploy. I am not suggesting we wait so these players pick up foreclosures, but this same type of private investment/work-out can be done on normal mortgages/homes that are in negative equity without punishing the person's, who is underwater, credit. And I believe it could be done in scale. The bank holding the mortgage will take a hit, but they made the poor decision in the first place. Something Geitner did seem to acknowledge.
There is no reason private investors cannot approach banks holding the mortgages and work out purchases at lower prices. The private investors can then establish new affordable mortgages, possibly with the existing homeowner, and start the pattern of on-time payment discussed above - eventually having the homeowner re-mortgage directly with a bank. In the process, hopefully a market bottom would be set. I cannot tell you it would not be a "lower low", but it seems like a reasonable method of price discovery to me. And the government would not need to pump in a penny!
-2outof4
Well, Treasury Secretary Geitner just announced the "plan" for dealing with troubled assets and, well, didn't really say much! The stock market reacted by being down 3.5%. Strange move by Treasury and the administration, given they knew people wanted something of magnitude. I guess we'll wait around for details.
I am not here just to whine. I really do want to offer solutions when I see them. I don't have solutions for much, let alone the kind of tough questions we are discussing. However, an entrepreneurial and very respectable friend of mine may have a solution for one issue!This friend is in the business, with a trusted partner, of purchasing foreclosed houses that need renovating, renovating them and then reselling them. Sound familiar? I'm not talking about the housing flipping shows of 12 months ago. The catch is that he is buying them at auction (often below tax assessment), so his downside is limited. Then he is selling them to buyers who banks would not loan to! How does he do this?
The home purchaser, who for whatever reason did not have the credit to qualify for a mortgage, pays my friend a rent payment, a portion of which is set a side as future equity in the home. At the end of two years, if the purchaser is up to date on all his or her "rent" payments, a bank will offer that person a mortgage on normal terms. At that time, my friend is paid out by the bank for his initial investment and makes a profit on the difference between what he purchased the house for and what he added to it and the amount for which it ultimately sold.
The bank is willing to deal with the purchaser because he or she has proven his or her credit issues are in the past. The bank is willing to give my friend the initial mortgage because of assets he has to secure them but also because of the prices paid for the homes (lower risk). This is just a case of an entrepreneur going to a local bank and the two parties sitting down and working with each other in good faith. One of the roots of American entrepreneurship!
A lot of these community banks exist and have capital to deploy. A lot of private investors exist and have capital to deploy. I am not suggesting we wait so these players pick up foreclosures, but this same type of private investment/work-out can be done on normal mortgages/homes that are in negative equity without punishing the person's, who is underwater, credit. And I believe it could be done in scale. The bank holding the mortgage will take a hit, but they made the poor decision in the first place. Something Geitner did seem to acknowledge.
There is no reason private investors cannot approach banks holding the mortgages and work out purchases at lower prices. The private investors can then establish new affordable mortgages, possibly with the existing homeowner, and start the pattern of on-time payment discussed above - eventually having the homeowner re-mortgage directly with a bank. In the process, hopefully a market bottom would be set. I cannot tell you it would not be a "lower low", but it seems like a reasonable method of price discovery to me. And the government would not need to pump in a penny!
-2outof4
Stock List Clarification
Just a point of clarification, none of the stocks on the Longs and Shorts list are stocks that my employer is invested in. I thought that would present too many conflicts of interests.
There are lots of stocks though that I look at that for one reason or another my firm is unable to or does not want to invest in, that are still interesting ideas for the individual investor to look at.
-2outof4
There are lots of stocks though that I look at that for one reason or another my firm is unable to or does not want to invest in, that are still interesting ideas for the individual investor to look at.
-2outof4
Monday, February 9, 2009
Does Negative Equity Flood the Market with Defaults?
I hope not to be thought of as similar to 'The Majestic', but with some of this stuff I find it hard to be my usual light-hearted self. Maybe on Fridays we can let one of the earlier commentators follow the desire to force a third topic in there and post top political and financial babes and hunks? I know Alec Baldwin's vote would be for Condi...
Anyway, back to the idea of housing leading he economic downturn and the need to do something about it. A reader, who is a good friend from Nashville, pointed out that I probably have a bit of the "renter's" view. In other words, if home prices go down, I lose nothing and only gain. That's true. I can't really escape it. However, I also cannot escape the point that it does not make sense to try and keep asset prices at an unreasonably high level. It seems to me that any mortgage rate subsidization (hearing 4%) or mortgage backed securities purchases by the government is just an attempt to keep something at an artificial level. How long does it go on for and how does the government get out?
The tax rebate, also mentioned by my friend, for mortgage interest expense is already one nice subsidy for housing. If the Maestro had not lowered interest rates to next to nothing in the first place, we probably would not be in this situation. Let's take our lumps now and get back to a normalized economic growth rate - which unfortunately is probably less than what we've experienced over the past decade.
Another argument is that falling housing prices will just tie people to their homes and the workforce will not be able to move to new jobs elsewhere. Similarly, people will not be able to downsize if they want because they will owe the bank so much. I think the size of this negative feedback loop (selling begets more selling and lower prices still and banks go bankrupt) may be exaggerated. If you bought a house, you likely aim to live there for at least five years. If on paper if you have negative equity, as a result of itemizing your interest expense and fully deducting it, even with typical monthly improvement/upkeep payments, you are probably approximating in monthly payment what a rent payment would be for a similar property.
For example, if you got a $400k no money down, 5% fixed 30 year mortgage, your monthly payment would be $2,563.95 with 1.25% property tax and no PMI. But if you net out your interest expense tax rebate (assume even interest payments over the term of the mortgage) your payment would be about $1,500. So add $300 (arbitrary) a month in "upkeep" to that and you get $1,800. If you put 10% down your monthly payment is approximately $200 less. I am willing to bet that rent from a landlord on a similar property is at least in the neighborhood of $1,800. So if you plan on staying in your home, its probably worth not incurring the costs of moving and makes it unlikely that you will just walk on your property. Hopefully, property values base and negative equity turns positive as more of the principal is paid down (granted unlikely over five years).
If you want to leave town because you have a job elsewhere, but are underwater, in that situation it probably makes sense to just walk. Your credit will take a hit, but you have a job and that should aid in at least finding a place to rent. If you are underwater and need to downsize in order to keep a livable lifestyle, but the bank won't speak w/ you because you have defaulted on a payment, it probably makes sense to try and work some sort of modification of principle out with the bank. There is no need to be ashamed or in denial of the need for this sort of workout. Maybe it takes a couple of missed payments to facilitate this, but probably best not to get to that point and try to deal with bank up front.
I feel bad for people who are underwater and detest the liar loans, bad bankers, brokers, and Realtors who pumped this market up but how does supporting asset values in the context of a market that still has a lot of excess supply makes sense? The money will be spent, but that is no guarantee that confidence will return.
The government should be more focused on unwinding some of these banks, protecting depositors deposits and assets and in a balanced way letting some of these insolvent institutions go. I read an interesting view yesterday that this is what should have happened with Lehman and AIG. The institutions that profited on the upswing should not be bailed out by the government in the downturn. America is a place of change and new faces in the banking industry make sense. Same in the Fed. Didn't Ben Bernanke claim there was no housing issue weeks before taking office?
-2outof4
Anyway, back to the idea of housing leading he economic downturn and the need to do something about it. A reader, who is a good friend from Nashville, pointed out that I probably have a bit of the "renter's" view. In other words, if home prices go down, I lose nothing and only gain. That's true. I can't really escape it. However, I also cannot escape the point that it does not make sense to try and keep asset prices at an unreasonably high level. It seems to me that any mortgage rate subsidization (hearing 4%) or mortgage backed securities purchases by the government is just an attempt to keep something at an artificial level. How long does it go on for and how does the government get out?
The tax rebate, also mentioned by my friend, for mortgage interest expense is already one nice subsidy for housing. If the Maestro had not lowered interest rates to next to nothing in the first place, we probably would not be in this situation. Let's take our lumps now and get back to a normalized economic growth rate - which unfortunately is probably less than what we've experienced over the past decade.
Another argument is that falling housing prices will just tie people to their homes and the workforce will not be able to move to new jobs elsewhere. Similarly, people will not be able to downsize if they want because they will owe the bank so much. I think the size of this negative feedback loop (selling begets more selling and lower prices still and banks go bankrupt) may be exaggerated. If you bought a house, you likely aim to live there for at least five years. If on paper if you have negative equity, as a result of itemizing your interest expense and fully deducting it, even with typical monthly improvement/upkeep payments, you are probably approximating in monthly payment what a rent payment would be for a similar property.
For example, if you got a $400k no money down, 5% fixed 30 year mortgage, your monthly payment would be $2,563.95 with 1.25% property tax and no PMI. But if you net out your interest expense tax rebate (assume even interest payments over the term of the mortgage) your payment would be about $1,500. So add $300 (arbitrary) a month in "upkeep" to that and you get $1,800. If you put 10% down your monthly payment is approximately $200 less. I am willing to bet that rent from a landlord on a similar property is at least in the neighborhood of $1,800. So if you plan on staying in your home, its probably worth not incurring the costs of moving and makes it unlikely that you will just walk on your property. Hopefully, property values base and negative equity turns positive as more of the principal is paid down (granted unlikely over five years).
If you want to leave town because you have a job elsewhere, but are underwater, in that situation it probably makes sense to just walk. Your credit will take a hit, but you have a job and that should aid in at least finding a place to rent. If you are underwater and need to downsize in order to keep a livable lifestyle, but the bank won't speak w/ you because you have defaulted on a payment, it probably makes sense to try and work some sort of modification of principle out with the bank. There is no need to be ashamed or in denial of the need for this sort of workout. Maybe it takes a couple of missed payments to facilitate this, but probably best not to get to that point and try to deal with bank up front.
I feel bad for people who are underwater and detest the liar loans, bad bankers, brokers, and Realtors who pumped this market up but how does supporting asset values in the context of a market that still has a lot of excess supply makes sense? The money will be spent, but that is no guarantee that confidence will return.
The government should be more focused on unwinding some of these banks, protecting depositors deposits and assets and in a balanced way letting some of these insolvent institutions go. I read an interesting view yesterday that this is what should have happened with Lehman and AIG. The institutions that profited on the upswing should not be bailed out by the government in the downturn. America is a place of change and new faces in the banking industry make sense. Same in the Fed. Didn't Ben Bernanke claim there was no housing issue weeks before taking office?
-2outof4
Oldie but Goodie
I just added another book to the book list. This is a must read for everyone. I read it years ago after a friend's dad recommended it. My wife recently devoured it in between various manifestations of Chick Lit (is that one or two words?).
The above man retired in his early 50's while putting four kids wonderful kids fully through college. I'd say he and his wife were less flash and a lot of substance.
http://www.amazon.com/gp/offer-listing/0671015206/ref=pd_bbs_sr_olp_1?ie=UTF8&s=books&qid=1234235923&sr=8-1
The above man retired in his early 50's while putting four kids wonderful kids fully through college. I'd say he and his wife were less flash and a lot of substance.
http://www.amazon.com/gp/offer-listing/0671015206/ref=pd_bbs_sr_olp_1?ie=UTF8&s=books&qid=1234235923&sr=8-1
Shorts
I just posted a couple of "short" ideas. When you short a stock you are trying to make money on the share's price going down. It is an excellent balance to your Long positions and reduces overall exposure to the market. It is also why some hedge funds made moeny money last year.
If you use an online broker you just select "Short Sell" from the drop down menu instead of "Buy". Technically your broker (Charles Schwab, etc.) borrows the shares from its own account or the accounts of its clients, and then sells them into the market on your behalf. Your account gets the money received for the shares. When you want to get out of the position, you place a "Buy to Cover" order for the number or fraction of the number of shares you originally shorted. The shares are bought on the open market and returned to the account from where they were borrowed. The difference between what the borrowed shares were sold to the market and what you bought them back at is your profit or loss.
"Shorts" will be tickers of stocks I think are worth looking at to Short. When I take a name off the list, it will be removed from the list and I will post a quick write-up as to why.
-2outof4
If you use an online broker you just select "Short Sell" from the drop down menu instead of "Buy". Technically your broker (Charles Schwab, etc.) borrows the shares from its own account or the accounts of its clients, and then sells them into the market on your behalf. Your account gets the money received for the shares. When you want to get out of the position, you place a "Buy to Cover" order for the number or fraction of the number of shares you originally shorted. The shares are bought on the open market and returned to the account from where they were borrowed. The difference between what the borrowed shares were sold to the market and what you bought them back at is your profit or loss.
"Shorts" will be tickers of stocks I think are worth looking at to Short. When I take a name off the list, it will be removed from the list and I will post a quick write-up as to why.
-2outof4
"Four Bucks is Dumb"
Hey, not my words! I thought this article about the "poster child" of the last decade was interesting.
I'm not bashing The Bucks per se - I love the stuff! And I think what Schultz does with employee healthcare is great.
http://online.wsj.com/article/SB123413848760761577.html?mod=rss_whats_news_us
Are You in 401k and 403b Misery?
Don't despair! None of us want to open those end of year statements or log in online. But it is your retirement, so don't be afraid to take charge!
People have asked what I am doing with my 401k, whether I am lowering the allocation (the money I put in from each paycheck) or getting out of stocks, etc. I'll tell you but first let me relay a little story.
Someone close to me, who works for a county school system, recently told me that her 403b (non-profit equivalent of 401k) "advisor" told her there that American Funds (the people that provide the different funds in her 403b plan) did not have a cash-equivalent fund for her to put her money into. Essentially, she is within five years of retirement and wanted a "near-cash" place to store the portion of her retirement money, so she would have some left when retirement came.
First of all, I am not sure why there is a middleman for her to change her allocation - maybe a union thing. Second of all, this joker encouraged her to stay in all stocks because the market was sure to make a turnaround in '09. Last time I checked, if you are five years to retirement there is no chance you should be in 100% stocks, unless your 401k is just a small percentage of overall retirement assets and it is what you treat as your "risky allocation", and there is no way this guys "knows" what the market is going to do this year. Third of all, I think this guy played on the person in question's wording. You see she asked for CD or CD like asset. The "advisor" could probably say truthfully that there was no CD option. He should have said, "but we have a cash equivalent fund you can put your money in". The same guy also put off the future retiree for a few days. These clowns should be willing to spend a few minutes on the phone with you whenever you call! If not, ditch them! (I am sure this will be a topic that will be picked up in the future.)
Anyway, as far as your 401k goes, don't be afraid to make adjustments to what makes you feel comfortable. But don't give up on using it altogether. In fact, this might be the time to increase the percentage you set aside to 401k. It is still one of the most tax efficient vehicles for saving even if you just invest in the money fund option.
Say your paycheck is $100 a month. If your goal is to save 15% of each paycheck and your tax rate is 25% then the math works like this - $15 of each paycheck goes to 401k and you are taxed on $85 dollars which leaves you w/ $63.75. If you skip 401k but still try to save 15% of each pre-tax paycheck you are left w/ $75 after tax and then $60 after you set aside your savings. So over the course of 24 paychecks (a year's worth) you are putting an extra $90 a year in your pocket or toward whatever you want by using the 401k option (almost an entire paycheck in this example!). So keep up that allocation.
As for me, I still have MANY years to retirement, but I felt the 40% hit of '08 and unlike the "advisor" above, I have NO clue what the market is going to do this year. So, I use some caution in my allocation. My current employer offers fidelity funds and the allocation of my deduction is as follows:
23% in a Dividend Growth fund
23% in a Overseas fund
23% in a Small Cap fund
23% in a Bond(like) fund
8% in their Money Market Fund
There is still a ton of risk within this allocation, but the dividend fund, fixed income (bond) fund and cash make me sleep a little easier. (Maybe I'll lose 30% instead of 40% this year.) You want to keep your risk tolerance, time horizon (time to retirement), and needs in mind. If you are retiring in five years and you absolutely need your 401k to survive in retirement, you probably want to raise your allocation but focus it in the money market options that your plan offers.
I am interested to hear what others think and are doing! Don't be afraid, take charge of your money.
-2outof4
People have asked what I am doing with my 401k, whether I am lowering the allocation (the money I put in from each paycheck) or getting out of stocks, etc. I'll tell you but first let me relay a little story.
Someone close to me, who works for a county school system, recently told me that her 403b (non-profit equivalent of 401k) "advisor" told her there that American Funds (the people that provide the different funds in her 403b plan) did not have a cash-equivalent fund for her to put her money into. Essentially, she is within five years of retirement and wanted a "near-cash" place to store the portion of her retirement money, so she would have some left when retirement came.
First of all, I am not sure why there is a middleman for her to change her allocation - maybe a union thing. Second of all, this joker encouraged her to stay in all stocks because the market was sure to make a turnaround in '09. Last time I checked, if you are five years to retirement there is no chance you should be in 100% stocks, unless your 401k is just a small percentage of overall retirement assets and it is what you treat as your "risky allocation", and there is no way this guys "knows" what the market is going to do this year. Third of all, I think this guy played on the person in question's wording. You see she asked for CD or CD like asset. The "advisor" could probably say truthfully that there was no CD option. He should have said, "but we have a cash equivalent fund you can put your money in". The same guy also put off the future retiree for a few days. These clowns should be willing to spend a few minutes on the phone with you whenever you call! If not, ditch them! (I am sure this will be a topic that will be picked up in the future.)
Anyway, as far as your 401k goes, don't be afraid to make adjustments to what makes you feel comfortable. But don't give up on using it altogether. In fact, this might be the time to increase the percentage you set aside to 401k. It is still one of the most tax efficient vehicles for saving even if you just invest in the money fund option.
Say your paycheck is $100 a month. If your goal is to save 15% of each paycheck and your tax rate is 25% then the math works like this - $15 of each paycheck goes to 401k and you are taxed on $85 dollars which leaves you w/ $63.75. If you skip 401k but still try to save 15% of each pre-tax paycheck you are left w/ $75 after tax and then $60 after you set aside your savings. So over the course of 24 paychecks (a year's worth) you are putting an extra $90 a year in your pocket or toward whatever you want by using the 401k option (almost an entire paycheck in this example!). So keep up that allocation.
As for me, I still have MANY years to retirement, but I felt the 40% hit of '08 and unlike the "advisor" above, I have NO clue what the market is going to do this year. So, I use some caution in my allocation. My current employer offers fidelity funds and the allocation of my deduction is as follows:
23% in a Dividend Growth fund
23% in a Overseas fund
23% in a Small Cap fund
23% in a Bond(like) fund
8% in their Money Market Fund
There is still a ton of risk within this allocation, but the dividend fund, fixed income (bond) fund and cash make me sleep a little easier. (Maybe I'll lose 30% instead of 40% this year.) You want to keep your risk tolerance, time horizon (time to retirement), and needs in mind. If you are retiring in five years and you absolutely need your 401k to survive in retirement, you probably want to raise your allocation but focus it in the money market options that your plan offers.
I am interested to hear what others think and are doing! Don't be afraid, take charge of your money.
-2outof4
Sunday, February 8, 2009
Material and Guest Posts
To one of the comments below, I welcome any material you either want to post as a comment or send me directly. People talking and thinking is likely the best way out of this mess - and we could have used some more of it in the early stages.
-2outof4
-2outof4
Housing
One of the biggest issues facing Americans today is housing prices and the immediate effect that falling home prices have on the economy and peoples' desire and ability to consume. The topic provokes a lot of fiery response.
Lots of people want to prop up home prices. I noticed that the Senate supports a $15,000 tax credit toward the purchase of a new home in the latest version of the stimulus bill.
My view is that over the last six years we have lived through one of the greatest asset bubbles ever, and that just because asset prices increased and now they are lower, it does not mean we need to get back to the elevated prices. Americans need to take our lumps and generate real economic growth rather than support false asset prices. We did not deserve to take out 100% loan-to-value mortgages, we did not deserve to spend $10 a day at Starbucks, and we did not deserve to drive around in the latest supped up Hummer (and replace it every two years).
These thoughts are expressed below in an email I recently wrote to Elizabeth Warren, chair of the five-member Congressional Oversight Panel created to oversee the implementation of the Emergency Economic Stabilization Act. She is clearly an intelligent woman but as it relates to this issue and "getting America back on track", I think her focus should be elsewhere. The email follows:
Dear Ms. Warren,
I wanted to reach out to you regarding your interview on NPR. I heard the interview last night, 12/11.
You seemed set on providing mortgage relief for people who were unable to afford their mortgage payments or were “underwater” on those mortgages. Why in your view is it important to backstop these mortgages and people, who should not have gotten into those homes in the first place? Why do you and others appear to be making an argument that everyone deserves to live in an owned home and that asset prices should remain artificially inflated?
In my view, assets prices across all asset classes have fluctuated over time and we have continually seen fortunes made and lost as a result of those so-called bubbles. No one was calling for assistance when the tech bubble burst. Investors in the tech bubble speculated and eventually got burned, but that is part of free markets. That is why they are called free markets.
For three and half years I have told my soon-to-retire mother to book her gain on price appreciation on her townhouse in the Washington DC area. I suggested selling and downsizing since she is nearing retirement age. She has seen her home, and greatest source of retirement capital, decline in value by about $300,000 in the past year and a half. However, she is not complaining because she knows she had the opportunity to book the gain and that the gain was unprecedented. There is no apparent reason why she would have a right to a lower mortgage or some other sort of plan to keep homes in her neighborhood at the same “value”. That would be the antithesis of a free market.
I can direct some blame to the banks, real estate agents, originators, et al., but the buyers are also complicit. And I believe this complicity was equally spread among equally greedy parties. A buyer could see the mortgage payment and their monthly paycheck and determine whether he or she could afford the payment. If that individual made the decision to purchase a house on the assumption that it will appreciate in value indefinitely into the future that is either the definition of greed or ignorance.
Can you tell me a sound reason as to why X percentage of the citizenry “deserves” to own a home? Instead of artificially supporting prices, we should just let the system wash itself out and life will go on. Sure, people will be poorer, but the home prices were inflated to begin with and that can be confirmed by comparing average selling price to replacement cost at the peak of the bubble. Even the most unsophisticated buyer could easily see that in early 2006 that he or she could get an interest only mortgage or rent a comparable place and that in some cases the mortgage payment would be 2.5x the rent payment (and more in some markets). This decision just did not compute if one looked at average house appreciation over time rather than over the last five years. I can supply a specific example from my own experience if you would like to see the math.
For all of those people that are complaining because they cannot afford their mortgages or have lost hundreds of thousands of dollars in house appreciation, I say “tough”. And that includes my own mother! Do you think that my father-in-law and mother-in-law (public servants for the last 25 years), who just paid off their retirement home in full deserve some kind of rebate for their financial responsibility? I would love to more clearly understand your view as to why we should support bogus asset prices. Can you offer a clearer explanation or direct me to a paper that can?
Sincerely,
2outof4
Lots of people want to prop up home prices. I noticed that the Senate supports a $15,000 tax credit toward the purchase of a new home in the latest version of the stimulus bill.
My view is that over the last six years we have lived through one of the greatest asset bubbles ever, and that just because asset prices increased and now they are lower, it does not mean we need to get back to the elevated prices. Americans need to take our lumps and generate real economic growth rather than support false asset prices. We did not deserve to take out 100% loan-to-value mortgages, we did not deserve to spend $10 a day at Starbucks, and we did not deserve to drive around in the latest supped up Hummer (and replace it every two years).
These thoughts are expressed below in an email I recently wrote to Elizabeth Warren, chair of the five-member Congressional Oversight Panel created to oversee the implementation of the Emergency Economic Stabilization Act. She is clearly an intelligent woman but as it relates to this issue and "getting America back on track", I think her focus should be elsewhere. The email follows:
Dear Ms. Warren,
I wanted to reach out to you regarding your interview on NPR. I heard the interview last night, 12/11.
You seemed set on providing mortgage relief for people who were unable to afford their mortgage payments or were “underwater” on those mortgages. Why in your view is it important to backstop these mortgages and people, who should not have gotten into those homes in the first place? Why do you and others appear to be making an argument that everyone deserves to live in an owned home and that asset prices should remain artificially inflated?
In my view, assets prices across all asset classes have fluctuated over time and we have continually seen fortunes made and lost as a result of those so-called bubbles. No one was calling for assistance when the tech bubble burst. Investors in the tech bubble speculated and eventually got burned, but that is part of free markets. That is why they are called free markets.
For three and half years I have told my soon-to-retire mother to book her gain on price appreciation on her townhouse in the Washington DC area. I suggested selling and downsizing since she is nearing retirement age. She has seen her home, and greatest source of retirement capital, decline in value by about $300,000 in the past year and a half. However, she is not complaining because she knows she had the opportunity to book the gain and that the gain was unprecedented. There is no apparent reason why she would have a right to a lower mortgage or some other sort of plan to keep homes in her neighborhood at the same “value”. That would be the antithesis of a free market.
I can direct some blame to the banks, real estate agents, originators, et al., but the buyers are also complicit. And I believe this complicity was equally spread among equally greedy parties. A buyer could see the mortgage payment and their monthly paycheck and determine whether he or she could afford the payment. If that individual made the decision to purchase a house on the assumption that it will appreciate in value indefinitely into the future that is either the definition of greed or ignorance.
Can you tell me a sound reason as to why X percentage of the citizenry “deserves” to own a home? Instead of artificially supporting prices, we should just let the system wash itself out and life will go on. Sure, people will be poorer, but the home prices were inflated to begin with and that can be confirmed by comparing average selling price to replacement cost at the peak of the bubble. Even the most unsophisticated buyer could easily see that in early 2006 that he or she could get an interest only mortgage or rent a comparable place and that in some cases the mortgage payment would be 2.5x the rent payment (and more in some markets). This decision just did not compute if one looked at average house appreciation over time rather than over the last five years. I can supply a specific example from my own experience if you would like to see the math.
For all of those people that are complaining because they cannot afford their mortgages or have lost hundreds of thousands of dollars in house appreciation, I say “tough”. And that includes my own mother! Do you think that my father-in-law and mother-in-law (public servants for the last 25 years), who just paid off their retirement home in full deserve some kind of rebate for their financial responsibility? I would love to more clearly understand your view as to why we should support bogus asset prices. Can you offer a clearer explanation or direct me to a paper that can?
Sincerely,
2outof4
Saturday, February 7, 2009
Book List
Keeping up with our two out of four topics, I will try and post related books that I think are both digestible for everyone and interesting. Coincidentally, Joel Greenblatt coauthored David Einhorn's fascinating book. Please feel free to offer suggestions. I will try and read suggestions that sound interesting and post to the Book List after that. Enjoy your weekend!
-2outof4
-2outof4
Longs
Hello. I added a list titled "Longs". This list will fluctuate (sometimes frequently) based upon my thoughts and analysis regarding various stocks. "Longs" will be tickers of stocks I think are worth looking at to Buy. When I take a name off the list, it will be removed from the list and I will post a quick write-up as to why. Friends and family always ask me for "stock recommendations" and I always hesitate to give them out because investing is not just buying, but also selling! Enjoy.
-2outof4
-2outof4
Friday, February 6, 2009
Introduction
Welcome to my Blog! As the URL suggests, I want this Blog to be a place where people can discuss two out of the four taboo dinner conversation topics - money and politics. I like to discuss religion and sex too, just not here.
Both money and politics are tied together more than ever these days, but more and more I find that people and the media tend to cover them with broad brush strokes and generalizations. My goal here is to point out issues and suggest solutions.
My day job is an analyst at an investment firm and I think pork barrel spending is disgusting. However, I am an Independent and hope that will come out in the politically balanced views expressed at 2outof4.
You may disagree with some of the views and some of the advice may be lousy, but at the very least, I hope to get both you and me thinking!
-2outof4
Both money and politics are tied together more than ever these days, but more and more I find that people and the media tend to cover them with broad brush strokes and generalizations. My goal here is to point out issues and suggest solutions.
My day job is an analyst at an investment firm and I think pork barrel spending is disgusting. However, I am an Independent and hope that will come out in the politically balanced views expressed at 2outof4.
You may disagree with some of the views and some of the advice may be lousy, but at the very least, I hope to get both you and me thinking!
-2outof4
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