Hi All,
We’ve been following the on going anti-credit card legislation thats currently going through congress. Here is a great recap from American News Project. At 5:39 its a quick watch. Might be worth your time to see whats going on with potential changes to your card agreements.
Hi All,
Maybe this is obvious by now, but I wanted to urge our readers to stay away from two economic sectors: domestic automotives and banking. This may be somewhat controversial, but here is my thesis:
Banking:
1) Banking will continue to suffer. Why? Several reasons. First, a toughened, but contradictory regulatory environment is beginning to take shape. The Federal stress test has reaffirmed the need for tougher oversight on the part of the treasury. At the same time there are a number of government programs in place to modify the terms of existing mortgages to make them more amenable to borrowers. These two policy trends work at cross purposes. On the one hand, banks are encouraged to lose money by making their products more acceptable to borrowers, on the other, they are forced to improve their capital base by Federal regulators. Its a no win situation.
2) There is still a TON of junk on the balance sheets of banks. While a lot of the subprime loan are being written off, there is still a titanic amount of questionable loans on big finances books. Specifically, a number of Alt-A and option ARMs will be coming due in the next two years (1,2). These loans are thought to be similar to subprime in that are issued to less than perfect borrowers. Nobody really knows how much these loans are going to cost.
There are a number of other reasons to stay away from the banking sector, but a hostile regulatory environment and unforeseeable losses should be enough.
Detroit:
The major reason not to invest in American domestic automobile manufacturers is: they’re all bankrupt. As of this posting, rumors are circulating around the internet (we’ve reported them) that Chrysler will file for bankruptcy. Similarly, Ford is bleeding money. Their most recent quarterly loss was something like 1.4 billion. Ford said that was great because they weren’t losing money as fast as previously. Thats ridiculous. A $1.4 billion loss is awful. it means Fords business model isn’t working. Finally, GM’s problems are well publicized. They bear little repeating here, but its enough to mention to that GMs bondholders are negotiating for control of the firm (1). This means their management has lost control and can’t make a profit.
So, just to sum up, both of these industries are troubled. In addition, the nation is a very bad recession, so they’ll have the added drag of trying to do business in a poor economy.
Folks, its dangerous to give investing advice, but please if you are thinking about these industries for a long term position, please reconsider. You can build your wealth faster and at a much lower risk elsewhere.
Best,
James
Disclosure:
We jointly own 270 shares in Umpqua National Bank (UMPQ) and Miel owes 100 shares of Citigroup (C). We are currently NOT adding to our positions.
Hi All,
Just heard the news on NPR.
Chrysler will file for bankruptcy.
Rest In Peace
Update: story is being carried by CNN.
Best,
James
Hi All,
Kiplinger media produces a much underrated series of videos for fans of personal finance. If you’ve got any mutual funds, you might be interested in this one. Basically the video looks at 5 ways you can minimize taxes when investing (which you can then invest to build wealth!). In a nutshell they are:
1) Sell investments only after 1 year for a lower tax rate
2) Watch your tax basis, reinvested dividends count towards your basis
3) Moving cash between accounts can be taxable
4) IRAs and 401ks allow tax free trading
5) The full value of appreciated stock can be deducted for charity
More at Kiplinger.
The latest numbers are out. The GDP declines by 6.1% first quarter of 09. Ouch!
(Bloomberg).
Hi All,
Here is a term you might not have heard: hostage value.
Hostage value is when a lender loans you more than the value of the underlying collateral. For example it used to be common practice that a lender would lend you $10,000 and secure it with $2,000 worth of household goods. The lender would then demand full payment of the $10,000 by threatening to take you to court – in effect, using your assets as leverage to get you pay more for something than it is worth.
TARP bailout watchdog Elizabeth Warren says hostage value is the reason so many lenders don’t want to participate in mortgage renegotiation schemes (CreditSlips).
This is a serious issue. A fellow blogger of ours, J Money, is underwater by $60,000 on is place in DC (BAS). How much incentive does the bank have to negotiate with J? Not much. J is being held hostage by his bank.
Best,
James
Everywhere else is the pits, but the Bay Area is doing good (SF Chronicle).
The Feds are backing up to 10.5 trillion worth of the U.S. economy. This roughly the same as the 2008 US GDP (CNN).
Finance magazines are going out of businesses. O the irony! (Marketwatch).
How Madoff was able to scam so many people for so long (CNN).
Of course, Trump is bragging about how he didn’t invest in Madoff (BI).
Treasury borrowing is at all time records (yahoo).
Up to 25% of U.S. companies are potentially insolvent (CFO).
Here is one thats local to us DINKS. The state of Oregon is currently facing a 3 billion shortfall. This means the recession is hitting home, essential services like law enforcement and medical care are getting cut in our hometown (RG).
Best,
James
Hi All,
Just saw this presentation. It outlines some of China’s past economic growth and gives some thoughts on the countries projected future. It makes a compelling case that the middle kingdom is on a trajectory to become a global superpower. China has created incredible wealth in a relatively short period of time.
Provided the video is correct, smart investors might consider investing in china.
Here are 12 ways to get started.
Hi All,
If you want to kill some time today, consider surfing over to the NY Time’s website. They have a nifty little calculator that lets you compare your debt to a sample of 92 households from 2004.
I plugged in the value of our first mortgage ($285,000) and saw that our mortgage alone means my wife I have more debt than most of the country. Yikes! We better concentrate on living frugally so we can pay it down!
Enjoy! The link is here.
Best,
James
Hi All,
It’s Monday. Over this last weekend I was having coffee with our neighbor Derek enjoying the nice weather. Our neighbor was of the opinion that the economy was going to get better in the next couple of months. We like Derek, so I didn’t want to flatly contradict him. However, dear reader, please don’t think good times are right around the corner. There are plenty of reason to suspect that we are at in for at least 6 more months of recession.
Why?
First, the banking sector is still very weak. I’m not an expert, but I suspect that the results of the treasury’s “stress test” will reveal that a significant portion of the banking industry will require additional capital. In addition, the FDIC has been releasing a steady stream of press releases indicating smaller banks are going into receivership. This month alone has seen 9 more (1).
Second, unemployment figures are likely to remain bleak. Depending on how you calculate it, last month saw between 749,000 and 633,000 jobs lost. If the USA Today’s survey of economists is correct, then we’ll be seeing an increase in those numbers for April (1). More likely than not people will stop spending as much, live frugally, and get creative just to stay afloat.
Third, Federal economic policies are unsustainable. So far, Bernake and Paulson have been dumping billions of dollars into the banking system. Congress recently passed a huge omnibus spending bill designed to inject billions into the economy. All of this, unfortunately has been funded by borrowing. As a result, the national debt stands at nearly 11 trillion dollars (1). All this borrowing means the Feds can only keep up public sector demand for so long, ultimately demand will need to come from the private sector.
Fourth, private sector demand will be hindered by the need to deleverage. In 2008, the NY times reported that an average U.S. household owed $117,952 (1). Total US corporate debt in quarter four of 2008 was something like 7.1 trillion (1). These figures are coming down, but ultimately demand is probably only going to pick up after private sector debt is reduced. This will take some time.
Okay, so, what does all this imply for building wealth? Well, my wife and I are probably going to focus on bonds for next few months. For example, I’ve taken what disposable income I’ve had and put it into my ROTH IRA. When I get the $3,000 needed, I’m going to buy into the Vanguard Total Bond Market Index fund (VBMFX). Bank weaknesses, unemployment and the need to deleverage all mean a recovery is probably months away so its not the time to take on added financial risk.
Best,
James
Edit: Henry Blodget disagrees.
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