An Experiment In Scotch

I write to discover what I believe

Category: Money

You Can Tell It's A Bubble By The Idiots

I’m gonna give you a quote I just read on Money.com. You just let it sink in for a minute (emphasis mine):

“At $2 a share, you might as well just let them go bankrupt,” said Fred J. Wallace, a Houston retiree who owns 1,500 Bear Stearns shares, which he bought last month. Wallace, 62 years old, said he bought the stock with his retirement money when he heard a Bear Stearns executive on television saying the company was sound financially. “If I get contacted for a class-action (lawsuit), I’m interested in being involved,” he said.

Ahem. Let me get this straight, Mr. Fred J. Wallace, you bought 1500 shares of a company’s stock because said company had an executive who said the company was sound financially?!? Faulkner couldn’t come up with words to express my level of amazement. People in Houston must be bloody idiots after Enron and now this guy. Wow. Just Wow. You bought a stock that had to have been priced in the $80s that was so overexposed to the subprime market, any idiot with a stock screener could have found it, and you now want to join a class action?

We’re in for some bad times economically speaking, folks. This is the exact kind of crap that happened during the last bubble when Enron and Tyco and Global Crossing blew up in our faces. It’s going to get uglier and IMNSHO, it’s going to be a long recovery. I really hope I’m wrong but when you have average investors like Fred J. Wallace showing up in the articles, I don’t think I can be. I’m no expert but I can tell you that I sure wouldn’t want to be too exposed to the market over the next 12-18 months.

What Is So Hard About Money?

I listen to WRR on my daily commute and Smith Barney currently has a commercial out with some woman apparently whining about how she and her husband don’t know how to talk to their kids about money. They can talk about sex, drugs, smoking but money? Not a clue. The ad tries to convince you that you need a Smith Barney rep to help you talk to your kids about money. The commercial is part of a bigger series on Working Wealth, whatever the hell that is.

I know it’s a commercial but it drives me insane. On one hand, it makes it disturbingly clear why so many people make horrible decisions when it comes to their money (ARMs, home equity loans, cars that cost as much as they make in 6 months, etc). But on the other hand, are we really a nation now that doesn’t know how to teach kids about money? Christ, it’s not that hard.

When I was growing up, I had a set of chores and if I did those chores, I got an allowance. Also, if I got straight A’s, I got a bonus. I saved money for things I wanted. Pay for performance. Objective results, objective rewards. Welcome to the real world. Instead, this woman says her speech basically goes “well if you get good grades and help out around the house, we’ll talk about it.” Subjectivity doesn’t cut it if you’re going to reward someone. Anyone who has ever had to give an employee review knows this.

I know it’s probably a stretch but to me, this is an extension of the progressive movement in America basically saying “You’re ok, I’m ok.” Relativism becomes mainstream. What are good grades? Good for me might be D’s but no sane person would think objectively that D’s are good. Some things just aren’t relative. How you make money and save money are things that aren’t relative.

What Goes Up, Must Come Down

Or so the adage goes, though it certainly looks like it may hold a kernel of truth when applied to the stock market. The DJIA crashes 400 and change today, the largest loss since the day markets opened after 9/11. The Chinese market took a dump over night and that cascaded through the intestines of the world economy like so much undercooked chicken. What does it all mean? Hell if I know but here’s some thoughts.

Lots of people currently in the market have never seen a day like this, one where seemingly small events have a huge impact on the market. We probably saw a ton of panic all day and may continue to see some. Is this the trigger that starts a correction? I think it might. We’ve been flying high for a long time in the face of cascading bad news and maybe Mr. Market is finally paying attention. I think another 7% loss over the next 6-12 months wouldn’t be a bad thing at all, returning the market to a semblance of balance and making a lot of stocks look much more attractive.

I think building a decent sized chunk of cash over that time frame would be a good idea, one I’ve already started. If the panic continues, stocks have a lot of room to fall before they become super attractive. If it doesn’t, I see the market pretty much moving in a narrow range over that time frame until the housing market and the debt market hit the wall.

Some interesting news from today: US Consumer Confidence hit a 5 year high. That’s probably a great reason to sell all the stock you own. Wanna bet it goes down a tad next month?

Existing home sales rose to a 7 month high with the chief economist from the National Association of Realtors predicting a small bump in the road from February storms but “that will be followed by a continuing recovery in home sales”. Always be nervous when it seems like there might be a conflict of interest like the chief economist of a Realtor’s association predicting every things is fine.

The subprime mortgage market continues to get killed though this should hardly be a surprise to anyone (surprisingly, it was a surprise to lots of people). Subprime lenders write mortgages to people to have bad credit. They have been able to do this in the past because home prices have been increasing at an ungodly rate of 14% and change year over year. Turns out, when you loan money to people who can’t possibly pay it back without their house going up 14% in value every 12 months, you happen to have a bad business model. The ARMs and the no-interest loans we saw everywhere in the past will be gone soon and they may take the American economy with them.

Jim Jubak writes a mostly good article on what happened in China today though I do have a nit to pick. About halfway through, he throws this interesting bone out there:

    The stock market has become a prime tool for passing a big hunk of the country’s growing wealth to the elites whose support the Communist Party needs to maintain its hold on power. (You’ll be excused if you think this is strikingly like how capitalism works in overtly capitalist countries.)

Now I’m pretty sure Jim leans to the left when he farts but to me, that seems like a stretch. In one country (China), the government basically controls the stock market as he explains. In another (America, sure one of the overtly capitalist countries he disparages), the government doesn’t. The elites do tend to make more money in the market in capitalist countries but not because of the government. The US Govt. doesn’t hold 2/3rds of most of the public companies here. The US Govt. doesn’t have a single party that needs to bribe the elites. C’mon Jim, that’s just a pretty ridiculous thing to say unless I completely misunderstand the point.

All this and more makes me worry about the economy and the market over the short run (12 months). I’m happy to have a big position in cash, waiting to see what happens next. Can’t wait to see what tomorrow brings.

Thoughts on Investing

On my current reading list is The Intelligent Investor and so far, I’m pretty pleased with it.  I’ve read the first two chapters and am already rethinking how I evaluate stocks, bonds and investments.  The difference between investing and speculating alone is worth the price of the book.  In our current state of information overload, most investing information forgets about evaluating the actual value of the company you are buying a piece of.  It’s important to always evaluate any possible purchase or sale of stock based on the value of the company.

I’ll write more as I continue to read.

Ignoring Bad News

Today, a report came out with the numbers for Americans’ savings rate for all of 2006 and the numbers aren’t good.  For an entire year, Americans had a negative savings rate meaning we spent all of our disposable income and even dipped into savings or borrowed to spend some more.  This makes the second year in a row that we had a negative savings rate, something that hasn’t happened since the Great Depression.

Contrary to prevailing thoughts, most debt is still bad, especially high interest no collateral debt.  When the housing market corrects (and I’m positive it will), the American economy (and hence the world economy unless China and India really step up) will be in serious trouble.

Minimum Wage and Economists

Back in October of 2006, the Economic Policy Institute released a paper that made lots of headlines.  The title of the paper was “Hundreds of Economists Say: Raise the Minimum Wage”.  In it, 659 economists signed on for support of raising the minimum wage to $7.25 which is apropos of the current debate in Congress over just this issue.

The Econ Journal Review has just released a fascinating (if you’re an economics geek) paper which sent a questionaire to the 659 signatories of the first paper asking them about their support of raising the minimum wage.  95 of the signatories completed the questionaire and the results are very interesting.  The survey was broken into to broad mechanisms, labor-market and socio-political.  Almost all of the support for raising the minimum wage fell into the socio-political bucket, i.e. a moral, philosophical reasoning vs. an economics reasoning.

The survey was meant to increase discussion between economists on this issue and the responses to the survey are fascinating.  Regardless of where you fall on the “Raise the minimum wage” issue, I highly recommend reading it.  Once done, you can get some great commentary in the comment thread for the article over at Marginal Revolution.

A Uniquely 21st Century Problem

K recently asked me about our money situation is, where things stand and where we are going. I told her that we probably wouldn’t buy much stock any time soon because I don’t believe the economy is in good shape at all and that 2007 will be bad news economically, specifically in relation to what I believe is an impending housing collapse.

At the time, I didn’t have any real concrete proof but when I read articles like this one, I feel pretty secure in my analysis. We, as a nation, have become so accustomed to carrying debt, specifically unsecured, high-interest debt that it is hardly possible to think of what might happen if that debt came due. When you back that debt by drawing equity from your house, the risks are unimaginably high should something bad happen either to you personally or to the economy and housing market.

When people who make a quarter of a million dollars a year carry 33% of their income in credit card debt not to mention a second mortgage, something is very very wrong. This economy is no different from past ones and eventually, that debt will come due. This is not some Brave New World where debt has no consequence. Eventually, the housing ATM spree we’ve gone through over the past 5 years will come back to kill us.