Sunday, November 05, 2006

The Upcoming Election and Your Portfolio...

Historically there has been a great deal of buzz surrounding national elections in the US and the possible impacts on the street.

I've heard less talk about this issue this year. The general consensus is that a stalemate in Washington (one house controlled by each party) would start to curtail spending and possibly be a good outcome for stocks.

I think this is a remarkably simplistic view. In a single variable model, perhaps this could be true, but the stock market is a composite of thousands of individual stories that are likely to be unaffected by the election. I'd expect a little 2-3 day rally if Congress is split on Tuesday, but I'll fade that rally.

Other reasons to fade this current rally

- viewership of Kudlow & Co. on CNBC is up 124% y-over-y. A good sign that the little guy is back in the market (generally that is a sign of a top).

- Everyone is pounding the table on tech stocks, again. Different year same story.

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Again, it's just anecdotal, but I was in Lowe's again on Saturday. I bought two 31" bathroom vanity mirrors - originally - $88 each for $6.50. I don't mean to imply that the Watertown, NY store is indicative of the entire Lowe's chain but that's not a great sign.

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I hate to mention politics on the blog because it REALLY gets people fired up, but this story is not really political - it gets back to my point that Congress may not be able to be trusted with our $2.8 Trillion.

After successfully fighting corruption and misuse of funds by contractors in Iraq, the House Armed Services Committee (Isn't our Rep. McHugh on that Committee?) has inserted a clause that will shut the special auditors office in Iraq.

"Investigations led by a Republican lawyer named Stuart W. Bowen Jr. in Iraq have sent American occupation officials to jail on bribery and conspiracy charges, exposed disastrously poor construction work by well-connected companies like Halliburton and Parsons, and discovered that the military did not properly track hundreds of thousands of weapons it shipped to Iraqi security forces.

And tucked away in a huge military authorization bill that President Bush signed two weeks ago is what some of Mr. BowenÂ’s supporters believe is his reward for repeatedly embarrassing the administration: a pink slip."

Thursday, November 02, 2006

Hmmm, Gas falls from $3 to $2.22 and We're not blowing it all at Walmart?

The "decline" in gas prices from August to today was thought to be a source of excess cash for retailers, particularly big-box retailers like Walmart.

Walmart said today they are not going to hit their 2-4% growth targets instead posting gains of just 0.5%. "Wal-Mart saw a 0.3% increase at its namesake stores and a rise of 2% at its Sam's Club locations in October. The company said it expects flat U.S. same-store sales for November." My wife commented recently that it seems like Walmart is being run like Kodak circa 2001 - they're watching someone eat their lunch and seem befuddled by it. I agree that Walmart has past their crest and for all the talk of expansion in China/Mexico, etc., this ship has sailed.

I think the greatest problem with Walmart is their inability to think outside the box. They know only one way to drive sales - get bigger. Look at the number of supercenters serving Upstate NY. They are clearly trying to gain a larger share of every dollar spent, but at some point they exceed saturation and all the cash spent chasing growth is just going to further pinch margins.

It's been a good run Sam, but like Woolworth before you the decline of this monster of retail has begun (Pssst - if anyone has an in at Walmart I have an idea that just might spark new growth opportunities for the next 20 years).

Wednesday, November 01, 2006

GDP not so GRRRRReat!

The anemic GDP numbers from last week got some attention for coming in below 2% but when the real number crunchers went to work we got some staggering data.

On the cover page they announce that motor vehicle output accounted for 0.72% of the 1.6% GDP growth number. This immediately sent anyone with two brain synapses still firing to try and figure out how our auto industry contributed ANY growth given the disasters that GM, Ford and Chrysler are today.

The big three effectively had a fire sale on SUVs and light trucks this summer which led to a 5.5% decrease in wholesale prices which, due to mathematics of output/production, had the effect of boosting GDP by 3/4ths of a percent.

Without this number GDP might have been 0.9%. Look for Q4 GDP to better reflect the weakness in autos and Q4 might be an eye opening number.

Cramer Insanity Watch....

It won't be long until we'll be able to look back and laugh at the quaint antics of that lunatic on CNBC Jim Cramer. Unfortunately, his little show has the potential for costing people some serious coin. It is no different than Dr. Phil trying to diagnose someone in 10 minutes on his show. To offer stock advice one stock at a time with no time horizon or knowledge of the investors' risk tolerance is insane. But it gets ratings so here we are.

I've only occasionally seen the show, but I tried to sit through a whole episode last week. I wasn't successful. Anyway, during his show he decided to pound the table on Lowe's upcoming quarter. Yikes. Has he been in a Lowe's lately? I was in one tonight where a stack of light fixtures was marked down from $38.95 to $1.98. Granted they looked like a large drop of mud, but that's still a huge markdown.

Lowe's is the most closely tied retailer to the home equity boom that I can imagine. That boom is over and Lowe's has not seen a bottom (down about 2% since Cramer called the bottom).

Monday, October 30, 2006

Return the Power of the Purse to the People

A very enlightened article from the Canadian press (interestingly not very well published in the US) covers some of the looming problems for our economy.

"There are serious problems and no easy solutions - and the hard solutions include raising taxes and cutting benefits, the kind of talk that can doom a politician's career. "

I've been saying for some time now that the three big issues facing us as a country over the next 15-30 years are: Social Security, Medicare and Taxes.

Social Security needs to be adjusted. You'll note that I said adjusted not privatized. You will have to pay in more, get back less at retirement and probably defer retirement until you are 70+. Social Security is the easy one to fix.

Personal income taxes need to be raised on those making over $500,000/year. Maybe the number is $750,000 or $1,000,000 but the top tax rate needs to be edged up to help offset the surge of spending since 2000. I know one day when I'm running for a Senate seat in 2018, this post will come back to haunt me, but you have to face facts and the current tax rate for high wage earners is too low to support our spending. Raising taxes is hard but doable.

Medicare is a mess. I don't know how to fix Medicare and I'd love to hear a good idea on how to fix Medicare.

Oh and by the way our interest payments are increasing every year and we can't refinance with Ditech.com.

The problem with this sort of big picture thinking is that it requires someone to look beyond the current election cycle. This is where I think we need to propose something bold. Something almost radical. Let's take the power of the purse away from Congress.

Congress should continue to legislate, but it seems that all of the corruption, scandal, waste and mismanagement in Congress seems to be tied to their ability to dish out pork. Well, if we take that role out of their hands, Congress should immediately improve in its ability to legislate.

I propose that the next President (Republican or Democrat, it makes no difference) should establish a bi-partisan group of business leaders, accountants, finance professionals to serve terms of 15 years. They will control all spending during this period and determine real financial and tax policies to right this ship. Without a bold move like this I don't see how we'll ever make the necessary changes needed to improve our financial outlook before it is too late.

Below are a couple of quotes from the article that might jolt us into action.

"Their basic message is this: the U.S. national debt is currently US$8.5 trillion and it could reach $46 trillion or more over the next few decades, adjusted for inflation, if the status quo doesn't change. That's almost as much as the total net worth of every person in the U.S. - Bill Gates, Warren Buffett and those Google guys included.

And every year that nothing is done about it, Walker says, the problem grows by $2 trillion to $3 trillion."

Pass this on to Senator McCain, Senator Clinton, Senator Obama, Governor Richardson, etc, etc. If you can think of a politician with political aspirations in 2008 mention this idea. Maybe, just maybe, they'll wake up before it's too late.

Recommend this post to DIGG, FARK and Delicious. Maybe the power of the web will make someone notice that the acme anvil is falling off the cliff and our foot is still tied to it. Beep, Beep!

Friday, October 27, 2006

Housing Market a Drag on Economic Growth

Hmmm, where have I heard this before? Housing and a bloated trade deficit slowing economic growth?

Housing Market a Drag on Economic Growth

WASHINGTON (AP) --Economic growth slowed to a crawl in the third quarter, advancing at a pace of just 1.6 percent, the worst in more than three years.

The latest snapshot of the economy, released by the Commerce Department on Friday, showed that the slumping housing market figured prominently in the economy's dramatic loss of momentum. Investment in homebuilding was cut by the biggest amount since early 1991.

The reading on gross domestic product was weaker than the 2.1 percent pace many economists were forecasting. ''The housing bubble burst and that really knocked down growth,'' said Joel Naroff, president of Naroff Economic Advisors.

The third quarter's 1.6 percent growth rate was the weakest since the first quarter of 2003, when the economy grew at a 1.2 percent annual rate.

The economy's softness in the third quarter stemmed in large part from the cool down in the once-hot housing market.

Spending on home building dropped at a rate of 17.4 percent in the third quarter. That was the biggest drop since the first quarter of 1991 when such spending was sliced at a 21.7 percent pace.

Weak inventory building by businesses and the bloated trade deficit also played roles in weighing down economic activity in the third quarter.

Thursday, October 26, 2006

Greatest Clock in the world......

I've mentioned before that I'm a bit of a graph/chart geek. This clock is the coolest thing I've seen in some time. It's a remarkably simple, yet elegant representation of our movement along a time line.

This guy should be taking his code to Sharper Image and selling clocks like this for $69.99 next year.

Check out the clock here.

The Big Picture...

So, here we sit watching bad news pile up on the tape and the market keeps chugging higher. I'm sometimes seen as a purveyor of gloom and doom for the economy in the US, but clearly there is a disconnect between stocks and the economic reality today. So what gives?

This is a mirror image of 2002. In 2002, no news, no matter how positive was good for the mkts. Instead stocks ground lower every day. Today, bad news no matter how bad (how about losing $6 billion in 3 mths Ford) can't take a stock down. There are two main drivers of this ---

--- Most money today is being run by investment professionals that are followers not leaders and they are desperately chasing performance to enhance their year-end numbers. In 2005, it was easy to invest in commodities or commodity stocks and let it ride. In 2006, they've had to work a bit and now they are all chasing performance which might end very badly.

--- Most money managers are overly-obsessed with Fed Interest Rate moves. They continue to believe that there is a single variable model showing lower interest rates = higher stock prices.

My advice to sophisticated investors now is to trade the market short-term to the upside, but to use all profits to build substantial short positions. for 2007 and 2008.

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Re: Exxon's profits - yes it is unreal to earn $10 billion in a quarter, but it is the nature of the beast. Their cost per barrel doesn't change and when the price per barrel in the open market went up, their profits went up on the same trajectory. Don't blame Exxon, blame the 25yr-old oil trader in NY that pushed up prices because he thought he was a hurricane expert.

Tuesday, October 24, 2006

Money Mag/CNN's Rules to Grow Rich By...

An interesting tool to flip through for some general lifetime financial tips. Some are worthwhile tips while others are not exactly brain surgery....

1. For return on investment, the best home renovation is to upgrade an old bathroom. Kitchens come in second.

The return on investment on a mid-range bath modernization is 102% of its cost. Kitchens can add about 90% of their costs to the home's value.

So in summary, for every $1 you spend on your bathroom expect to get $1.02 back. Thank you very little. I'll put that $1 in the bank and get $1.05 back this year without having to sell my house.

3. Spend no more than 2 1/2 times your income on a home. For a down payment, it's best to come up with at least 20%.

Many buyers in recent years have stretched the limits of affordability, and have bypassed the traditional 20% down model.

This should be law. If you make $200k/yr you have no business buying a million dollar house.

5. Never hire a roofer, driveway paver or chimney sweep who is going door to door.

Huh? Do people still go door-to-door? If you need financial advice like this you have bigger problems in life than worrying about how you are going to retire rich.

11. If you don't understand how an investment works, don't buy it.

This is particularly true of insurance products which tend to be aggressively pushed locally. Buy 1 S&P Index Fund and 1 Bond fund and forget it.

22. Resist the urge to buy the latest computer or other gadget as soon as it comes out. Wait three months and the price will be lower.

Better yet wait a year or two and the price will plummet. You will be able to get a fully loaded laptop this xmas for $399. 37" Flat screens will be $999. 4GB MP3 players are under $80. Wait and spend the extra $$$ on that new bathroom :)

25. When you shop for electronics, don't pay for an extended warranty. One exception: It's a laptop and the warranty is from the manufacturer.

I'd even exclude laptops. If you spend $400 on a great laptop from HP it's not worth it to give BestBuy $150 for a warranty. If the laptop fails in 3 yrs go buy a new one when the price point is $199.

National Housing Picture.....

Nontraditional’ mortgages rise as overall origination falls
A slowing housing market has put a damper on first-mortgage origination volume for the first half of the year, an industry survey released Monday shows.

First-mortgage origination volume decreased 16 percent in the first half of 2006, while strong demand continued for interest-only and payment-option mortgages, or so-called “nontraditional” mortgages, according to a survey from the Mortgage Bankers Association trade group.

Interest-only loans accounted for 26 percent of originations in the first half of 2006.

The trade group said that subprime loans made up 19 percent of all originations in the first half of the year.

The average loan amount for subprime loans during the survey period was $200,167, a 7 percent increase from the second half of 2005.

Fifty-five percent of subprime originations during the first half of 2006 were for refinance purposes. !!!!!!!!!
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When the banks start getting stiffed by their borrowers remember this piece of info - 55% of subprime (risky) originations were refinancing!! These risky borrowers were probably locking in better fixed rates, but that doesn't mean they will be able to make the payments. Just another reason to stay really short the mortgage market.

Tuesday, October 17, 2006

The Real Estate Ripple...

Yesterday I came across some surprisingly frank comments from a realtor in Florida. Florida as a Real Estate market is deflating remarkably fast. I hope you didn't buy a condo in Naples or Miami last year.... I'll let Mr. Morgan's comments speak for themselves.

"Since my recent article in Barron's, I have received dozens of calls from builders, bankers, buyers and investment groups perched like vultures. Let me give you a sampling of a few calls.

Public Builder - Called me to find them bulk buyers with the ability to buy out all remaining units in developments they cannot sell. They are willing to sell at cost. I told them they were about 10% over the current distress market, and they didn’t even hesitate. They said, fine. Drop the price 10% and we’ll pay a 5% commission to you. Just help us get rid of this inventory.

Condo Developer - They have a 600 unit project that is 100% up for resale. This means no one is going to close when the building is completed in January. Every single buyer will walk from their 20% deposits. The developer will simply going to turn the keys over to the bank. And the bank will take a massive hit that will have the Feds on top of them in the blink of an eye.

Townhome Developer - Asked me to resell 132 units that they had sold a year ago for an average of $400,000 a unit. All of their buyers have notified them that they will not close. Unfortunately, even a year ago in the heated market these units were only worth about $250,000. Now, the units will not command more than $175,000 . . . if they’re lucky.

Real Estate Agent - She sold 10 of the 132 units I just mentioned to her friends, family, banker and co-workers (FORMER friends, family and co-workers). They’re all going to walk away from their $40,000 deposits, so they don’t lose $250,000. The developer will be stuck with 132 units that are not worth what it cost to build them.

Homeowner - This one really hurts, and this is the next wave of the massive tidal wave hitting this industry. As surfers know, the third set is the biggest. This homeowner purchased her home for $390,000 plus $15,000 in closing costs. It is now worth maybe $300,000. Their interest only ARM is scheduled for refinancing. The bank told them they need to come up with additional cash to cover the drop in equity. But they don’t have the $75,000 the bank wants. And even if they sell for $300,000 and clear $280,000, they can’t pay off their $390,000 mortgage balance. You see, their mortgage was 100% and it was interest only. They are going to walk away from the house and give it to the bank. The bank, if they are lucky, will sell the house for $300,000 less commissions and expenses. Maybe they will net out at $280,000. The math is simple. The bank, at best, will lose at least $110,000 on a $390,000 mortgage. That’s a 28% loss . . . IF they can sell at $300,000.

If you look at 1998, the total exposure to mortgage and home equity loans was about 25 percent. In the last quarter, the third quarter, it had risen to 37 percent.” I sold three homes last week for one public builder. Each of these homes sold for 40% less than the same homes sold a year ago. How about all of those neighbors when it comes time to refinance? The appraiser is going to look at current sales prices, and the bank is going to ask for additional funds to meet the equity requirements."

That is some ugly, ugly stuff. So the next time you hear someone say "We're only looking for a 5-10% adjustment in prices" remember this post.

On the flip side there will be some tremendous values in condos in Florida in 5 yrs :)

Monday, October 16, 2006

Anyone Linking through for the 10 Financial Commandments - Scroll down

I'm closing in on 5,000 visits since Feb 06. Now I know 4,752 of those are my mom, but still thanks to the other 248 of you.......oops I forgot the rest of the family visits 2x per week or 174 visits, so thanks to the other 74 of you that visited :)

The 10 Financial Commandments are below.

Bookmark Grindstone Financial and tell your friends..........

Hedge Funds are Sharing Information....Gasp!!

This lead story in today's New York Times probably has more than a few people nervous in Greenwich and on Wall St.

"The Movie Gallery case provides a window onto the growing power of hedge funds in financial markets, and raises questions about their role in how information flows on Wall Street. Hedge funds have become a dominant force in the New York and London stock exchanges, and now account for roughly half of all trading in those markets. But they also have recently become major players in the more opaque debt market, which includes bonds as well as loans, and is more than one and a half times as big as the stock market.

“If hedge funds are privy to inside information and they invest in different securities all over the capital structure, this raises lots of concerns” said Alistaire Bambach, assistant director for the Northeast regional office of the S.E.C. She declined to comment on any open investigation.

The power shift in the loan market has prompted the trade association for lenders to develop new guidelines, to be announced today, governing how confidential and material — meaning potentially market-moving — nonpublic information is used.

Lending was once a clubby world dominated by banks, which are highly regulated and go to great lengths to separate their various lines of businesses. To keep bankers from possibly sharing inside information with traders, some banks even separate their divisions on different floors and use coded identification tags to restrict access.

“Hedge funds have become a dynamic force in Chapter 11 cases,” said Harvey R. Miller, vice chairman at Greenhill & Company and the former head of the bankruptcy and reorganization group at Weil, Gotshal & Manges. “Where you used to have a syndicate of banks, today you have a syndicate that is mostly hedge funds, and it would appear they have different objectives than a syndicate of banks used to have. Their horizons are much shorter.”

Two quick observations:

1) In 2005 EVERYONE was hot for commodities - gold, oil, copper, etc - and frequent readers will know that I believe the hedge funds pushed prices up 20-30% above their natural levels. Well in 2006 it has been all about debt. Every time I speak to an industry contact they are begging me to help them understand debt instruments. These guys are in way over their head.

2) If you take away information edge, every hedge fund goes out of business. Their entire game is this - the big boys (the Yankees/Red Sox of the Hedge Fund world) get the call first "Movie Gallery is sucking wind", they put on a position and call the second tier of funds (White Sox, Dodgers, Mets) who put on a position and call the third tier (Phillies, Blue Jays), who put on a position and call ......... well you get the idea.

With hedge funds accounting for 1/2 of all trading there is no way Wall Street will let this business model change. Right or wrong (and it's most definitely wrong) this is the nature of the beast.

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Update - CNN actually ran the "Why have oil prices dropped?" story. About 2 weeks ago, I said it was no hurricanes, no Iran chatter, changing the Goldman Unleaded futures weighting and Hedge Funds bailing like they were going down on the Titanic. CNN concurs.....

"By late summer, hedge funds and other investors had poured billions into long positions in oil, gasoline, natural gas and the rest of what traders call the "energy complex," all betting on a replay of the severe 2005 hurricane season that sent prices soaring in the wake of Katrina and Rita. But one day after oil reached a monthly high of $76.98 a barrel on Aug. 7, government meteorologists downgraded their hurricane forecast and cautioned that a repeat of 2005 was "unlikely."

That announcement, combined with the end of the summer driving season and a recalibration of the Goldman Sachs commodity index that reduced the weighting of gasoline, prompted speculators to head for the exits even faster than they'd piled in.

According to Joel Fingerman of Chicago-based OilAnalytics.net, between the peak of $77 a barrel in August and the October low of just under $58, traders dumped nearly 40 million barrels (a 20 percent drop) from their long positions. The volatile gasoline market showed an even sharper decline - with traders cutting long positions from 32 million barrels in midsummer to just 1.7 million in October.

"Whatever you want to call it - speculators, fast money, hot money - a big part of the drop in crude that we've seen this year is because of selling by hedge funds," says Merrill Lynch technical analyst Mary Ann Bartels."

Sunday, October 15, 2006

The 10 Financial Commandments...

I'm lifting the framework for this comment from a pretty good cartoonist and his comments on the 9 keys to everything you need to know about financial management. Scott Adams is the creator of the Dilbert line of comics and for a cartoonists the simplicity of his ideas is pretty appealing to most investors....My comments are in italics
  1. Make a will - With access to will creation software like Willmaker there is no reason not to have done this. It's a 2 hour process for most people.
  2. Pay off your credit cards - I add to this ALL DEBT. Before you start thinking about investing you have to pay off all non-mortgage debt. Cars, consolidation loans (yikes!), student loans (unless the interest rate is below 5%), etc, should all be gone before you can do anything else.
  3. Get term life insurance if you have a family to support - Term is the best value if you have a family to support. If not, don't bother.
  4. Fund your 401k to the maximum - This assumes that you have good investment options. Assuming you invest in a low-fee index fund, I'd agree with this statement.
  5. Fund your IRA to the maximum - Obviously.
  6. Buy a house if you want to live in a house and can afford it - I like where this is ranked in terms of importance. A home is a way to own the property where you live, but it should NOT be considered a major piece of your investment portfolio. Too many people are risking their financial future by being overweight expensive real estate. The other key point is "If you can afford it". I'd say if you can afford it with a traditional 20-30% down and a traditional 30 yr mortgage. If the answer is no to traditional financing than you can not afford the house.
  7. Put six months worth of expenses in a money-market account - One day it is going to rain and it's nice to have access to cash until you get back on your feet.
  8. Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement - Ah, we finally get to investing and......... an index fund?? Well, the truth of the matter is that index funds are consistent, low cost ways to invest. Every broker will tell you something different, but that is because their livelihood is dependent on you believing them. The only people with any edge in the market are blackbox technicians and super smart money managers that have information flowing to them 24/7. If you can't follow the market 24/7, then you should invest in index funds.
  9. If any of this confuses you, or you have something special going on (retirement, college planning, tax issues), hire a fee-based financial planner, not one who charges a percentage of your portfolio - I agree that you should hire a fee based planner if you need a check-up but their value-add is limited.
  10. Track your expenses for a month - Put it all on paper and the $4 coffee or the $2 bagel will start to add up. You have to track and categorize every expense to make this worthwhile, but I think it's well worth the effort.

I wish it was more complicated, but it's really not. Unfortunately, because soooo many people have vested interests in trying to separate you from your money the appeal of such a simple plan would be lost on stockbrokers, insurance agents, real estate agents, financial planners, and banks.

Cheers!

Wednesday, October 11, 2006

Oil, Oil Everywhere and Prices Just Keep Falling...

Well, it seems the Oil at $100/barrel!! guy has finally taken his seat next to the Dow 36,000!!! guy and the BUY A CONDO IN NAPLES!! girl in the timeout chair.

As I said in the spring, the global economic backdrop supports oil around $55/barrel and anything above that is fear of hurricanes, war with Iran and 29yr-old hedge fund managers chasing the dream.

Cheney et al stopped bad mouthing Iran, Goldman lowered their weighting of Unleaded Futures in the commodity index, there wasn't a single meaningful hurricane in 2006 and poof --- Oil is heading to $55. But wait, OPEC is going to enforce quotas!! Trust me, all of these countries cheat and that is why the market didn't buy their quota press release today.

So, this is the situation - the global economic outlook is actually weakening so oil should continue to slide toward $50. Anything lower than that and OPEC will get serious, but I think we're going straight to $50. In fact, the November elections and hedge fund managers with itchy trigger fingers (who might start dumping positions in mid-Nov) could really impact prices as well (There is a 20% chance we're in the $40's by 2007).

This of course is good news for consumers, Walmart, and Applebee's because now that you're saving $7/fill up on gas we know you won't save your new found wealth. You and I and every other "Spend 'til we drop American" will spend the $$$ as fast as possible which should help some low-end consumer related stocks.

I stay as politically neutral as possible on this blog, but I'll point out that if the Democrats seize control of either the House or the Senate, look for Iran to become a MAJOR issue again very soon. I'd expect the Republicans to turn up the heat to make the Dems look weak on Terrorism (bonus points if you can tell me how the two are related!! lol) before the 08 election cycle begins.

This could mean a real threat of military showdown in 07/08. If that happens - Oil is at $80 again in a flash. Just one investment opportunity to watch for as you watch the pundits spin themselves silly on election night.

Cheers!

Alcoa: A Canary in the Coal Mine?

Alcoa will probably pressure the Dow this morning as they kicked off earnings season with a very poor miss. The story here - lower prices for their product and higher production costs - might be a consistent theme among commodity plays in the coming quarters.

As "weakness in its downstream business related to softening in the housing construction and automotive markets" hampered results I'd be scouring the markets for other stocks that serve housing and auto markets to look for shorts, attractive puts or calls to write.

From a more macro perspective, I am a believer that the scenario facing Alcoa is going to be increasingly pervasive across all facets of the US economy. Weak demand will hamper pricing, while inflation (it's real despite the government's assertions that ex-inflation there is no inflation) is going to really start pushing Cost of Goods up for many companies.

Alcoa is the most recent example of this scenario but it won't be the last.

Cheers!

Monday, October 09, 2006

For the Uber-Geek in you...

There is a 99% chance that if you're reading about financial matters on some random blog that you do not care who or what a Youtube is. But, for your children and your grandchildren it is a ubiquitous source of copyrighted video that can be rapidly access and shared around the globe.

Just a month or so after debuting their own video service, Google has decided to buy Youtube. I could go on for months how I hate this deal, but I think Google has a little bit of Microsoft paranoia going on right now and they are afraid of getting "googled" (to come out of nowhere and become the most dominant brand in the universe in 5 yrs) themselves. So I guess they figure it's a $1.65 billion insurance policy.

I'd say there is a 50% chance that Youtube's main source of good content (copyrighted video) is pulled in the next couple of years. Add to that the unreal amount of ads they will start forcing on young people that generally have the attention span of a fruit fly and you can see why I hate this deal.

BTW - Does no one remember this deal from the glory days in 1999???


Yahoo completes Broadcast.com acquisition

Yahoo today said its $5.04 billion acquisition of Internet audio and video streaming company Broadcast.com is a done deal, and it will begin integrating multimedia services throughout the Yahoo network.

Broadcast.com's content and services will be integrated during the third quarter of 1999.
The acquisition, first announced in April, will create an independent Yahoo Broadcast Services unit, allowing corporate customers to take advantage of Webcasting services and allowing advertisers and merchants to incorporate video and audio in their marketing.

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All this deal did was introduce the world to Mark Cuban. Thanks Yahoo....


"Why don't you ask the kids in Tiananmen square,
Was fashion the reason why they were there?"

Thursday, October 05, 2006

Re-Post: When is a Dow RECORD close not that important?

I decided to repost this article from earlier this week because it is increasingly relevant now that the Dow has surpassed it's earlier high.

DOW NEARS NEW RECORDS!!!
Let's break this down - if an index is just now reaching new highs after 6 years, do you know what that really means? That means that the index is actually FLAT over the last 6 yrs and if you adjust for inflation you are probably down about 10-14%.

But the fact remains that there is a decent chance that at some point over the next month we might close above our previous high. This will be a lead story in every paper and both political parties will run out to claim credit for the resurgent economy. Please, please don't fall for that. If you learn anything from reading my rantings it is that there is always a much more interesting story behind the scenes.

Here is that story - the Dow is a flawed price weighted index - I won't bore you with the details, but a high priced stock carries more weight. Of the 30 stocks that comprise the index 20 companies (like GM, Intel, Microsoft, IBM, Coke, Walmart) are DOWN from their 2000 prices. And furthermore, 16 of those 20 stocks are down a staggering 20% or more (4 were down 50% or MORE!!!).

To offset the weakness of these stocks you had to have some pretty stellar performance - that was achieved through a 60% gain for Exxon ($3 gas was good for someone), an 80% gain for Boeing (war is good for someone), a 99% gain for United Technology (war is really, really good for others), a 150% gain for Caterpillar (lots of backhoes sold to help overbuild condos in Las Vegas and Pheonix), and a 220% gain for Altria (Marlboro's are good for someone).

So as you can see, the "strength" of the Dow's resurgence has been concentrated in just a handful of companies - Energy, Defense Contractors, Construction and the old Phillip Morris. Not exactly a growth engine for a 21st Century Economy.

So if and when we do close above our 2000 prices on the Dow remember where that "strength" came from.

*** In the interest of full disclosure - I own shares in Altria - yippee for me, huh!!

Also an update on why gas prices have fallen........
In August, the major commodity index maintained by Goldman Sachs changed their weighting system to reduce the weight of Unleaded Gasoline from 8% to 2.3%. This might sound like a minor change but billions of dollars around the world march in lockstep with these indices and when Goldman made this change Unleaded Gas futures fell 8% in a day. There has been no major reason given for this change by Goldman, but it is the clearest indication yet as to why gas is lower at the pump. There are some conspiracy theories out there on the web, but I'll let you indulge your tinfoil hat theories on your own.


The next Google?

In 1999 - 2000, I saw maybe 15-20 companies trying to be the next Google. This was before Google became a $125 billion company, just imagine how many companies are trying to re-invent the wheel now.

My advice to anyone looking at investing in these companies is to smile politely and say next as quickly and as firmly as you can. The latest company getting buzz is in PRE-LAUNCH (meaning they've got a great idea, but no real company or plan to defeat GOOG) and is called Powerset. It's an interesting read over at Venturebeat on Powerset. What I find so intriguing is their focus on natural language search. You have be a moron to not be able to figure out how to get the search result you want with Google. In their example they say "Books by Children" won't produce results of books written by children. However, if you modify the search to Child authors or young authors, you get excellent results in 0.15 seconds.

Remember - be quick, be firm, NEXT............

FDIC comments on NYS economy...

Unfortunately or fortunately NY State's finances remain very closely tied the whims of the financial markets. The fall FDIC report is a great summary of what we see statewide. Rochester/Binghamton continue to lose jobs while NYC and Syracuse (why? Lockheed contract maybe?) are adding jobs. I highlighted a couple of interesting stats including a comment on building/housing that should be VERY interesting to watch in the coming months.

Steady job growth continues in New York aided by strong growth in the financial sector

  • The New York unemployment rate was 4.7 percent in August and continued to approximate the U.S. average. More than 117,000 new workers joined the state’s labor force through August 2006 year to year.
  • A weaker housing sector could dampen statewide job growth. However, jobs related to residential and commercial real estate represent a slightly smaller share of the state’s net new jobs since June 2002 (13 percent) than the nation (20 percent).
* I'd argue that that both of these numbers grossly underestimate the importance of real estate and related industries to the economy. All mortgage lenders, lawyers, and bankers fall under service jobs, Home Depot clerks under retail, etc, etc. The residential and commercial real estate job market is not limited to guys swinging hammers and selling real estate.

Finally, the most interesting stat is housing permits down 14% y-o-y and multifamily dwelling permits down 19% y-o-y.

Tuesday, October 03, 2006

The REALLY Big Picture...

When conversations shift at your cocktail parties this weekend to tax policy, trade deficits, dollar imbalances and monetary policy (admit it - that's what you really want to be talking about instead of the latest episode of Deal or No Deal) your eyes could glaze over or you might just have the most insightful comment of the night courtesy of Grindstone Financial.

There has been increasing financial press coverage of the US/World and US/China trade imbalances. An op-ed piece here and a nice summary here are good primers on the subject.

In a nutshell, the lack of fiscal discipline exercised by all levels of government - federal, state, local - has led to a massive amount of debt held overseas ($1 Trillion in China, $880 billion in Japan). When the interest on this debt was running 1% it was inconvenient, but not a huge issue. As rates are nearing 5% it's becoming a serious issue. If (when) rates hit 6%, 7%, or 8%+ this will be a full blown crisis.

Now here's the fun part: Most 8th graders with a primer in economics 101 can figure out how to fix this -

* You MUST Raise Taxes
* Recognize and allow inflation to rise
* The dollar has to fall further vs. world currency
* US workers face more wage cuts
and/or
* US consumers have to curtail their spending

Now I ask you in today's political environment, who is going to have the #^$#% to tell the truth and make these recommendations? Could you imagine the ad?

"My Fellow Americans we have spent beyond our means and today the Chinese Collection Agency informed me that we have to raise your taxes 15%, cut the value of the $ by 10%, cut your salary by 10% and you are banned from Walmart, Target, Costco and any restaurants that end in the ee's sound (Chili's, Applebees, etc) until further notice".

There would be riots in the streets before our country would accept a truthiness laced statement like that. So, the REALLY big picture is bleak, but don't expect anyone to tell you that.

** Remember the Dow hit a new high (note my previous post that the resurgent Dow is due entirely to Exxon, Boeing, United Tech, Caterpillar and Altria).

"You Can't Afford to Be Neutral on a Moving Train"

Monday, October 02, 2006

Real Estate Agents as Financial Advisors???

Let's ignore for the moment that prior to 2004, becoming a Real Estate agent was a career akin to coffin salesman or a used car dealer.

As housing prices have begun to stall out around the country local news teams have begun to do their own "investigative reporting" into this trend. For the most part this involves a reporter calling the real estate agent that sold them their overpriced condo last year to hear the calming tones "Real Estate is local. Our market is unique. Any downturn is destined to be short-lived. Real Estate remains a blah, blah, blah".

Would you go to Ford dealer to ask him about the new Toyota Prius? Of course not, because the Ford dealer has a vested interest in selling his products.

Well, asking a real estate agent about real estate is like asking a bartender if you should buy the $4 domestic or the $8 imported beer. Real estate agents feel the end of the party is near and they are doing their best to control the damage by circulating the message that "all is well, nothing to see here, move along".

One real estate agent on Channel 10 last night actually said "Well, this is normally a slow period anyway as kids start school...." You see, this is why you are a real estate agent. When the statistics came out showing a national decline in home prices y-o-y, it was for a comparable month in 2005 and thus any impact of seasonality would be wiped out because we are comparing apples-to-apples.

As it relates to the local markets, we still have over 2,000 listings in the NNY MLS. This is the most I can recall in the past 5 years. There is clearly a little boomlet in Watertown taking place, but this boom in retail establishments is likely to be short-lived and service jobs (while clearly a growing portion of our economy - UNFORTUNATELY) tend to be very unstable and low-paying. Beyond the increase in service jobs there is no meaningful change in the fiscal landscape in Northern New York and I'll put two forecasts into writing:

1) Many, many of the proposed housing developments planned for Jefferson county will be shelved in the next 2-3 years.

2) Within a year we will see year over year price declines in existing home sales in Jefferson County.

Finally, regarding housing despite what everyone tells you it is not an investment. At most, I want no more than 10% of any clients assets allocated to real estate. However, I'm told time and time again "my home is my nest egg". If your perceived value of your home minus your mortgage is more than 10% of your net worth, you either have too much riding on the value of your home or insufficient investements elsewhere.

I've been wrong before and I'll be wrong again, but you don't ask a mechanic for a prescription to treat your bad back and I would not listen to financial advice offered up by real estate "professionals".

Sunday, October 01, 2006

Allow me to introduce myself.....

After an extended absence I'm back, but Don't Call It a Comeback!! I've been here for years..

It might take a couple nights to get my groove back so bear with me. Here we go.....

Gas/Oil

Here is the deal - There was once a brilliant financial mind that wrote in April of this year....

1) Major oil companies are drilling like mad right now and they will bring online lots of new supply over the next 2-5 yrs. More supply = lower prices

2) The double whammy of real estate slowdown and rising interest rates is going to severely crimp growth in the US economy. Weaker US economy = lower prices

3) A slowdown of our economy will reduce manufacturing output and economic growth in China and the rest of the Asian developing world. Reduced economic activity in Asia = lower prices.

Kudos to those that could see this coming. In addition, there are a couple of other factors at play

- big hedge funds are rotating out of commodities and into credit derivatives (mark my words - this is the death knell for our economy)

- there is some speculation that we stopped filling the Strategic Petroleum Reserve

- And for whatever reason (political or otherwise) the rhetoric vs. Iran has come to a screeching halt.

These factors have all helped to lower the cost of a fill-up from $42.50 to $36.75. Now what to do with all that new found wealth?? Super-size two more Big Mac meals? Get a couple of outdated shirts from Kohl's Clearance rack?

The reality is gas gets way to much blame on the way up and way too much credit on the way down. Gas will, in my opinion continue to fall for the foreseeable future (at least through the first week of November, unless Iran does something to stir things up) because OUR ECONOMY IS IN REAL TROUBLE. I'll go into a further discussion of the economic risks facing us in posts later this week.

Stay tuned........


DOW NEARS NEW RECORDS!!!
Let's break this down - if an index is just now reaching new highs after 6 years, do you know what that really means? That means that the index is actually FLAT over the last 6 yrs and if you adjust for inflation you are probably down about 10-14%.

But the fact remains that there is a decent chance that at some point over the next month we might close above our previous high. This will be a lead story in every paper and both political parties will run out to claim credit for the resurgent economy. Please, please don't fall for that. If you learn anything from reading my rantings it is that there is always a much more interesting story behind the scenes.

Here is that story - the Dow is a flawed price weighted index - I won't bore you with the details, but a high priced stock carries more weight. Of the 30 stocks that comprise the index 20 companies (like GM, Intel, Microsoft, IBM, Coke, Walmart) are DOWN from their 2000 prices. And furthermore, 16 of those 20 stocks are down a staggering 20% or more (4 were down 50% or MORE!!!).

To offset the weakness of these stocks you had to have some pretty stellar performance - that was achieved through a 60% gain for Exxon ($3 gas was good for someone), an 80% gain for Boeing (war is good for someone), a 99% gain for United Technology (war is really, really good for others), a 150% gain for Caterpillar (lots of backhoes sold to help overbuild condos in Las Vegas and Pheonix), and a 220% gain for Altria (Marlboro's are good for someone).

So as you can see, the "strength" of the Dow's resurgence has been concentrated in just a handful of companies - Energy, Defense Contractors, Construction and the old Phillip Morris. Not exactly a growth engine for a 21st Century Economy.

So if and when we do close above our 2000 prices on the Dow remember where that "strength" came from.

*** In the interest of full disclosure - I own shares in Altria - yippee for me, huh!!

Later....

Wednesday, July 12, 2006

The Upside to Rising Rates...

I'm constantly amazed by complaints from people that local banks are still only paying 1% interest on their savings. The banks will only pay what the market demands and right now they know that you (their loyal, local customers) are not pulling out your money despite their paltry offerings.

For example

* Watertown Savings is now offering 1.25% on their standard savings account.
* Keybank offers an impressive 0.2% rate on their savings accounts.

The point is with little competition to force the banks to up their payouts the rates will not budge. Granted these banks do offer competitive rates if you are willing to lock up your money with them for the next 12-36 mths in a CD. That's not a good strategy in my opinion.

However, in the emerging world of online banking rates are very competitive.

Here Emigrant Direct is paying 5%.
HSBCDirect is paying 5.05%
and Citibank is paying 5%.

These banks are always competing for more press (ie, "The HIGHEST RATE in the nation") so when Citibank upped their rate to 5%, HSBC moved theirs to 5.05% a day later. This type of competition benefits consumers and you should take advantage of it.

Yes you will lose the pleasure of rushing to the bank by 4pm to catch the teller before she closes, but the rewards are worth it ;)

Given that the stocks have only returned about 3% over the past 8 yrs, 5% in an FDIC insured account looks pretty good.

Cheers.

Monday, July 10, 2006

Jefferson County Home Prices Up 57.1%!!

Okay, so I keep ranting that the sky is falling and the NYS Association of Realtors comes out to say that

"Jefferson County led the state in median sales price growth, recording an increase of 57.1 percent compared to the same period a year earlier."

57%!! Are you kidding? That is roughly 20 years of home price appreciation in a single year.

Unfortunately, we don't have access to all of the data to see if some specific sales skewed the data (I suspect commercial sales of land in LeRay and Outer Arsenal St. may have pumped up the numbers meaningfully). But let's assume the numbers represent traditional home sales. What could drive up prices by such an absurd amount?

Clearly limited supply or increased demand must be the main factors, right?

Let's look at supply. Today there are roughly 2,050 listings in the Northern New York MLS. I've watched the MLS fairly closely over the past couple of years and it has historically had 1,200-1,400 listings. There appears to be almost 50% MORE inventory today than there was last year.

Huh? But if supply is up than prices should be FALLING not rising, right?

Well, let's look at demand. This is harder to quantify. Realtors - who are in the business of making demand look strong ALL THE TIME - continue to cite the increased demand for housing from Fort Drum's expansion.

I'd love for someone to give me some hard facts to back this up. To the casual observer it seems many soldiers are single (not homebuyers), almost all soldiers make a very modest income (should not be homebuyers) and many soldiers transfer frequently (should not be homebuyers). To my eye, I'd guess that maybe 10% of the military population should be buying homes because they plan to live in the North Country for 10+ yrs and they can afford an inflated home price with rising mortgage rates. I'm very suspect that Ft. Drum is driving demand. I think perception is driving demand.

People in Northern NY have watched friends and family around the US get paper rich on real estate over the past 5 yrs and they want a piece of the action. Couple this with the local media's obsession to beat you over the head with one message "Ft. Drum is EXPANDING, BLAH, BLAH...." and you get a perception that home prices are going up and going to stay up.

Just in the past few weeks I've seen many asking prices taking steep dives as people realize that there is little real housing demand in NNY.

I'm afraid that too many families are putting their financial futures at risk in the hopes of reaping the benefits of investing in a home. Buy a home because you need a place to live, it should not be viewed as an investment vehicle.

Thursday, July 06, 2006

Oil, Oil Everywhere But Not a Drop to Drink...

Oil was once again making headlines this week as crude topped $75/barrel. The economist in all of you is probably saying "Well of course, supply is limited and demand is sky high so prices are rising". Well, that's what logic would say and that would be wrong.

According to the latest data out of the US Dept of Energy - Crude oil inventories stand at 341.3 million, leaving them 3.6 percent higher than last year. HUH??? Inventories are HIGHER THAN LAST YR?

``Inventories are ample; there's plenty of supply,'' Kyle Cooper, director of research at IAF Advisors in Houston, said yesterday.
Gasoline Declines

Okay, but surely gas inventories are lower even if crude inventories are up. "U.S. stockpiles of the motor fuel rose after imports jumped 33 percent to 1.27 million barrels" Inventories are up 33%???????

``If demand continues, there's a very good chance we could see prices try to test the $80 level,'' said Peter Beutel, president of Cameron Hanover Inc., a New Canaan, Connecticut energy consultant.

So, Inventories are "ample" perhaps even a bit excessive. Why am I still paying $3.00/gallon?

"Prices leapt July 5 after North Korea test-fired at least seven missiles in breach of a United Nations moratorium on the testing of long-range weapons."

Are you kidding me? This guy should have zero credibility on the world stage, but unfortunately our missteps in Iraq, our distraction with Iran and our lack of credibility on the global stage make the oil markets susceptible to the whims of a nutcase with 6 nukes and no means for delivering them.

Just wait until we hit the heart of hurricane season and a Cat 5 is churning in the Gulf of Mexico. $3 gas might look like a bargain.

Cheers.

Wednesday, July 05, 2006

How Can We Stem the Flight of Young Adults From Upstate New York?

The title of a recent article in the NY Times was The Flight of Young Adults in Upstate NY and it really struck a chord with me as someone that left the area as young adult only to return later in life. Clearly the population of upstate NY has been in a long steady decline for sometime, but I think the general consensus was that we were losing seniors to the south, but this data seems to reflect that migration patterns are even more pronounced among young adults.

This trend has HUGE financial implications for our state as we get older but our population of working adults shrinks yielding a smaller tax base.

The one caveat is that this article talks in broad terms about UPSTATE NY and clearly Jefferson County is bucking this trend to a small degree with increases in troop #'s stationed at Ft. Drum, but for the most part Ft. Drum is just a drop in the overall Upstate bucket.

My Question of the Day is this: What can reverse this trend? What can we change about Upstate NY to make it an attractive place for someone to bring their families?

I know the answer is simple - attract new industry, improve the schools, etc, etc, but people have been talking about that for 40 yrs.

I have some ideas, but I'd love to hear from you first - If you're the governor of NY what do you do today to stop the flight of young adults from Upstate NY?

I've pasted the majority of the NY Times article below b/c it is difficult to see old articles on their site.

**************************************************************************

Upstate New York is staggering from an accelerating exodus of young adults, new census results show. The migration is turning many communities grayer, threatening the long-term viability of ailing cities and raising concerns about the state's future tax base.

From 1990 to 2004, the number of 25-to-34-year-old residents in the 52 counties north of Rockland and Putnam declined by more than 25 percent. In 13 counties that include cities like Buffalo, Syracuse and Binghamton, the population of young adults fell by more than 30 percent. In Tioga County, part of Appalachia in New York's Southern Tier, 42 percent fewer young adults were counted in 2004 than in 1990.

Over all, the upstate population grew by 1.1 percent in the 1990's — slower than the rate for any state except West Virginia and North Dakota.

Population growth upstate might have lagged even more but for the influx of 21,000 prison inmates, who accounted for 30 percent of new residents. During the first half of the current decade, the pace of depopulation actually increased in many places.

David Shaffer, president of the Public Policy Institute, which is affiliated with the Business Council of New York State, described the hemorrhaging of young adults as "the worst kind of loss."

"You don't just magically make it up with new births," he said. "These are the people who are starting careers, starting families, buying homes."

In almost every place upstate, emigration rates were highest among college graduates, producing a brain drain, according to separate analyses of census results for The New York Times by two demographers, William Frey of the Brookings Institution and Andrew A. Beveridge of Queens College of the City University of New York. Among the nation's large metropolitan areas, Professor Frey said, Buffalo and Rochester had the highest rates of what he called "bright flight."

While the chronic economic woes upstate have been of growing concern for a decade or more, the accelerating departure of young people is considered particularly alarming.

As more young people depart, the population is aging. In Broome County, which includes Binghamton in the Southern Tier, the median age rose to 38.2 in 2004 from 33.3 in 1990.
"The number of upstate residents 45 or older increased by 15.3 percent, even as the number of young people, on whom they rely to hold jobs and pay taxes, went down sharply," Mr. Wilmers of M & T Bank said.

In Syracuse, total population losses may have been stanched since 2000 as children have returned to take care of aging parents, jobs have become available in more diverse fields and housing prices have become more affordable. "It's given us some hope that we're going to arrest the continuing decline of young people," said Mr. Davis, of the Metropolitan Development Association there.

Welcome Back!

Sorry for the slow posting over the past few weeks. Back in some of my earliest posts I described how the combination of rising rates, inflation, a weaken US dollar, falling real estate prices, a tapped out consumer and the weak job growth since 2001 were setting the stage for a financial market instability in the US in 2006 - 2008.

This thesis has continued to play out in rapid succession over the past 7 weeks. While we have had the occassional rally here and there to stem the downward slide the bias has clearly been negative as of late.

So please excuse the lengthy welcome back post, but I thought it might make sense to revisit some of these issues as they are becoming increasingly important for investors (and ulitmately consumers).

Rising Rates - Bernake is in no man's land. He needs/wants to stop raising rates, but the data keeps telling him to push on. I'm leaning toward one more hike followed by a pause of 2-3 meetings. I think this is a flawed strategy, but to be frank I don't have a better option. The markets might go crazy when the Fed says it's done. Seriously, we could be up 5-10% in the blink of an eye, but I view that as the last hurrah and a perfect entry point for long-dated market puts.

Inflation - I really wish these gov't nerds that keep preaching there is no core inflation would actually try to go buy something. As long as you don't have to buy any construction material, healthcare supplies or services, anything related to higher education, gas, food, real estate, etc, etc, I'm sure you would view the world as having little inflation, but for the rest of us inflation is here in a real way. Inflation has two causes increased demand or increased production cost. Thus, far production cost has been the primary driver, but I fear that by the time the fed figures out that Inflation is real - production costs will be falling and demand might be falling off a cliff (consider housing for example). Thus the Fed might start fighting a battle which is long over causing more damage to our economy.

Real Estate - Well, the word is finally out. The great Real Estate Boom is over. But here's the problem - this asset class is still in serious flux. Rising rates will pinch hundreds of thousands of new homeowners in 2006-08, just as the homebuilders flood the market with new inventory. If you are one of the few, the proud, the debt free homeowners of America stand up and take a bow, you are unlikely to be affected. If you plan on owning your home for another 20 years you too will also be spared. If you bought your house pre-2005 in Upstate NY, the damage should be minimal. However, if you bought a 4 bdrm colonial in Westchester in 2005 for $1.5 million with an adjustable rate mortgage - ouch.

I've said it before, but I think it is worth repeating the financial risks many families have undertaken in the pursuit of larger homes than they can afford (the standard # is that your fixed monthly debts - cars, credit cards, mortgage, student loans - should not exceed 25% of your net income) has the potential to shake the entire financial foundation of our country. When this gets really bad think of everyone in the real estate food chain that will have less $$$ to spend - Real Estate Agents, Mortgage brokers, electricians, carpenters, painters, plumbers, Home Depot employees, etc, etc.....

The world isn't coming to an end, but I'm a bit concerned about the near-term financial health of our nation. I would not want to be President in 2008. That person is going to have some very, very hard spending cuts/tax increase decisions to make.

Monday, June 12, 2006

Advice for the Class of 2006...

Really this goes out to all the grads that never had a parent willing or able to have a real face to face conversation on $$$.

I'm paraphrasing an article in today's NY Times with some of the bullets.....

* Say this with me - NEVER, EVER Play the lotto, scratch-offs or other crack-like state lotteries. These things are taxes disguised as entertainment which unfairly capitalize on the poor who have little understanding of their workings. The lottery provides a nice paycheck to the schools of our state every year, but it is not your duty to subsidize the schools until you are a property owner. When you are starting out the lottery may look tempting but run in the other direction. If you want to gamble ask for my tips on options pricing.....

* Make your own coffee. Say you spend just $3.50 every workday for your latte or mocha frappachino. If you drank the free office brew instead, you'd have more than $11,500 to play with after 10 years.

By the same logic, if you smoke, now is a good time to quit. Doing so will save you on average $25,600 over 10 years not to mention the enormous burden you will eventually be on my healthcare system if you keep smoking.

* Live within your means - This is hard in today's age of play now, pay later, but it's in your best interest. If you really need that new pair of jeans pay cash or earn the money to pay cash. Avoid credit card debt like the plague. More young adults are hurting their financial futures by excessive use of credit than we know.

Ciao

Thursday, June 08, 2006

So I'm not always this right...



The market tanks and rallies back over 180pts today? That's the classic definition of a tradeable rally noted at 9:12 this morning. I'm still looking to be long in the VERY short term as we bounce along for a couple of days.

I still look for a 15-30% decline in the mkts over the coming 2 yr period but for the next day or so we could be looking up (we got back about 1% of my 4% target today).

Image from Clayton last night. That was an amazing sunset........

Charge It Nation...

This recent Forbes article speaks to an issue near and dear to my heart the creaking of the American Financial system under the weight of mountains of consumer debt.

"Americans increased their borrowing in April at the fastest pace in 10 months as credit card spending and auto loans both picked up.

The Federal Reserve reported Wednesday that consumer borrowing rose at an annual rate of 5.9 percent in April, a significant increase from a tiny 0.8 percent gain in March.

The increase in dollar terms was $10.6 billion, which pushed total consumer credit to a record $2.17 trillion. The Fed's measurement of consumer credit does not include mortgages and other loans secured by real estate.

Economists are predicting that consumer spending, which accounts for two-thirds of total economic activity, will slow in coming months as gasoline costing around $3 per gallon leaves consumers less to spend in other areas."

I would disagree with the last point. I argue that $3 gas is actually a cause of more consumer debt purchases. Who fills up a car at $3/gallon with cash? Not I. Also, I argue that the pending collapse of the real estate market will sap any excess consumer spending.

The best real estate advice I ever received was from a banker at my first job in NJ "Take the other side of whatever Trump is doing". For the record Trump is building like a madman right now.

The thesis for the markets still holds...

My expectation that we've seen the highs for this "bull" market still hold. We've seen considerable weakness in the past couple of weeks and while I was clearly off by a couple of weeks (I expected it to start on or around 6/1) the directional call was correct.

I'd look for some consolidation in here - maybe even a tradeable rally based on the unemployment #'s and the news from Iraq. At some point in the next week (by 6/16) I'd expect us to pick up 2-4%, but the buyers will quickly run out of steam and I'd expect another leg down in the back half of June.

It is important to watch emerging markets as well they have been getting creamed in the past month.

Oil is also starting to slip (now under $70) which again fits the thesis that a global slowdown in the world economies will lead to lower oil prices.

***********************************************

Thursday, June 01, 2006

Momma MAKE Your Babies Grow Up To Be Hedge Fund Managers.....

Hedge Funds. When I say the words most eyes glaze over like I'm speaking French-Canadian. Hedge Funds in general refer to private investment funds which use unconventional strategies to achieve above average returns (in theory).

Where Hedge Funds really excel is at paying themselves. While a traditional mutual fund might struggle to get you to agree to a 1% fee, hedge funds have convinced the world that their brilliant investing style warrants a 2-5% management fee and 20%-40% of all gains generated!!

In the current market (2003 to present) this has made many of the top managers rich and look like geniuses far beyond their skill level.

According to an article in Alpha Magazine in 2005, the SALARY of the top hedge fund managers ranged from a paltry $130 million (there was actually a tie for 25th place) to a whopping $1.5 billion!!

The next time your kids are foaming at the mouth over how much money Jay-Z or Eminem made last year (I think they were both under $30 million) point out that the 26th best math geek on Wall Street make $130 million last year and see if that jumpstarts their interest in algebra.

I can't defend these pay packages. For the most part these people are being paid well for being in the right place at the right time. The real value will come in 2007-09 if they can continue to post 20% returns for investors in a weak market.

Congratulations to all those that made the list and to those that didn't, well that new Gulfstream G5 will just have to wait another year.

Housing and Stock Market recaps...

Since I began the blog back in February I've been talking about the precarious position of the US economy. The housing slowdown will impact the US consumer at a time when long-term rates have to rise to continue to fuel our government spending.

The more I have read about the real estate markets around the US, the more I'm convinced that we are not heading for a soft landing and the prospects of a real estate crash (prices down 40-50%) is very real. Consider some numbers from selected markets and some national data:

* Nationally, the number of new homes for sale stands at over 550k units. Only twice in the last 35 yrs have we ever had as many as 450k units for sale. Current inventory of new homes is 20%+ above the historical peak. Also, this figure does not take into account the tremendous inventory of condos and townhouses for sale or existing homes for sale.

* Inventory of homes for sale in Northern NJ is up 60% since January 1st!!!

* Mortgage rates are at 4 year highs and climbing. I still think we might see 7.5% by year-end which will completely kill the housing market.

* In Northern Virginia, a part of the Washington DC metro area, the number of active listings was 2,983 in April 2005, which increased by 241% to 10,038 in April 2006!!

The real estate bubble is bursting and you don't want to be the last one into this party because the clean-up will be ugly.

____________________________________________________________

The stock market has been all over the map. I was off by about 2 weeks - I really expected the market to start cracking around now 6/1, but it started early. I'm looking for a little of a reflex rally to really get short, because the signs are there that we are really top heavy in the market.

Our economy is so interconnected today that you can not overlook the importance of stock market moves. If, as I expect the market is weak in 2007 and 2008, look for dramatic reductions in tax revenues which will lead to hard choices come budget time for Congress. A Congress which apparently has never seen a spending bill they didn't like.

Finally, all those days of paying $3/gallon for gas appear to be catching up with the lower end of the economy. It's annoyance for most, but when $3 gas went from an aberration to permanent reality it severely curtailed spending for some (see Walmart's recent weak outlook). Again, I think gas will fall in 2007/2008 (assuming the hurricane's stay out of the gulf) but if you're house goes down in value 40%, your job is at risk b/c of budget cuts and your retirement portfolio goes down 20% with the market, is it really a good thing to be paying $2/gallon of gas?

Wednesday, May 24, 2006

Military personnel get 10% off at Home Depot this weekend!

According to this Forbes article - "all active duty personnel, reservists, retired military, veterans and their families can receive a 10 percent discount off their purchases in honor of Memorial Day. The offer is valid on purchases of up to $2,000 for a maximum of $200 between May 25 and May 29, 2006 at The Home Depot stores."

Seems like a pretty good deal but it's not being terribly well publicized. Particularly in an area like Watertown with a heavy military presence, I think they'd be out promoting this offer a bit more.

Cheers!

Tuesday, May 23, 2006

Markets don't like the bird flu....

The markets feel very 2002-ish right now. Whatever the news the markets want to go down. Today the market was up for most of the day until a story broke that there may have been a human-to-human transmission of bird flu in Indonesia, then we went south fast. These are preliminary reports, but human-to-human bird flu, if not contained, is a major, major risk to the global economy. I don't see it happening today or tomorrow - the mutations needed are just too complex - but it is possible and if it does happen, I'd like to be short the market and long lots of water and canned goods :)

Some people keep pointing to hurricane forecasts which are pushing up oil prices. I can't believe people are trading on this news. Forecasters are off by an average of 2+ hurricanes/yr. When you're talking about 3-8 storms/yr, + or - 2 storms is a big margin for error.

Also, there seems to be a presumption in the market that all of these storms will end up in the Gulf of Mexico. Again, flawed thinking as anyone in Coastal Carolina will tell you.

There are a lot of Jim Cramer-ites out there looking to push the market back up but they lack conviction. I can see both the Nasdaq and Dow bouncing 3% up from here, but by 6/1 I think we're going to start testing new lows.

Tuesday, May 16, 2006

Please excuse the light posting...

I'm in the home stretch of the biggest fundraiser of the year - tomorrow night in Clayton - and I've been working long and hard preparing for the dinner.

I'll be back later in the week with lots of interesting thoughts on interest rates and inflation. The markets are poised to move in a big way this week based on the data we see tomorrow.

Thanks for your patience.

Thursday, May 11, 2006

Take a bite out of Real Estate Commissions...

1) Empower yourself with good info - here's a new site Real Estate ABC which offers some pretty valuable insights into recent sales and prices paid. In the past, you had to track this info down through some ancient county filing system. Their pricing guides are clearly flawed, but it's worth clicking around.
2) Understand that commissions are negotiable. Right now in Jefferson, Lewis, St. Lawrence County there is a perception that the market is "hot" and realtors often act as if their fees are standard and non-negotiable. Everything is negotiable. I've never paid over 4% total commission in a home sale or purchase, yet I frequently see commissions listed at 6%, 7% or even 8%.

3) Be aware of the US market as a whole. I can home prices in Upstate quickly adjusting back down 20-40% if
  • Long bond rates continue to rise pushing up mortgage rates.
  • A domestic economic slowdown impacts tax receipts leading to lower defense spending (ie, scaled down expansion of Ft. Drum)
  • Inventory continues to build in upstate as less experienced builders jump on the construction bandwagon.

Last week I was told by a realtor that my home had appreciated more than 100% from my purchase price in 2003 less than 3 yrs ago. That's not sustainable.

This is why trading stocks is like performing your own open heart surgery...

It's always best left to professionals. The market at some point in the next month will have another "The Fed's almost done (REALLY!)" rally, but the market's obsession with commodity prices is bordering on silly.

As we've said before in the past commodity markets like oil, nat gas, gold, silver, etc were traded by industry players. Today every hedge fund with $10 and a dream is trading commodities. This is creating a very dangerous market for untrained investors. Hedge Fund managers and traditional portfolio managers are chasing new highs in almost every metal. These managers are trading in commodities like they are equities and the differences are stark.

I still think we get one more run at the records on Wall St. - 11,750 has been my target - but the increasing pressure on the US economy from weakening housing markets, rising long-term rates, reduced foreign investment, a weak jobless recovery since 2001 and a new Fed president that looks like a deer in the headlights means I'm getting increasingly negative on 2006 - 2010.

If I'm right - you heard it hear first. The 2008 election could hinge on the perfect storm of crashes - the stock market down 30%, commodities down 50% and real estate down 15% and falling like a brick - all occurring in 2007.

Monday, May 08, 2006

What's with Electric Rates?

National Grid, Pepco, BGE, PSC, etc, etc... These large utilities have more than just strange acronyms in common. More frequently these utilities are finding themselves on the receiving end of huge rate increases that are being passed along to you.

In 2005 I switched most lights to low-wattage fluorescent light bulbs and made a conscious effort to reduce my overall use of electricity. To my surprise it worked! My usage as measured by kilowatts was down almost 15% from 2005 to 2006, but to my surprise my bill was up 20%!!! The kicker? National Grid had managed to boost my rate by nearly 25% from 2005 to 2006.

The only notes I've seen regarding National Grid's rate increases relates to additional healthcare and pension costs they've incurred. I suppose it could be worse - we could live in Maryland.

Maryland residents are facing hikes of 35-70% in their electric rates according to this Washington Post article.

I do not have a problem with a competitive company operating in a free market charging more for their product if demand dictates higher prices. I do however have a problem with protected companies charging more for a product because their cost structures are flawed, they continue to exhibit poor management skills, and they invested cheap power vs. long-term solutions.

1) Cost Structure - Utilities are run like GM and Ford. Employ an aging workforce that is prone to health issues while doing little to reduce personnel costs.

2) Lack of Management Skill - Managing a utility is unlike managing any traditional business. Their inability to foresee demand or supply shifts is never punished, but rather is rewarded in the form of higher rates.

3) Poor Investments - Utilities around the country are now crying over the price of natural gas and oil. Well, I studied lots of clean, environmentally friendly coal technologies in 1991-94 that made sense with oil above $26/barrel. However, with oil at $18/barrel, every power plant in the country seemed to go w/oil or gas. How's that working out?

Frankly, for 85% of us higher rates are little more than an inconvenience, but consider for a moment the senior on a fixed income. He is told that there is little or no inflation so he earns 1% on his savings. However, he watches his heating oil bill jump 60%, his gas price at the pump jump 50%, his electric rates jump 30-70%, every delivery has a fuel surcharge of 5%, etc. etc.

Someone is being less than honest - either we have inflation and rates need to adjust OR the price increases are artificial.

I'll let you draw your own conclusions.

Wednesday, May 03, 2006

Random collection of thoughts...

It's been a busy week - sorry for the light posting. Here's a random collection of thoughts........

1) Oil/Gas - Oil's bouncing around (down over $2 today on news that inventories are up and demand remains unchanged despite $3/gal gas), but it's still trading above $70. This is clearly going to become a more substantial drag on the economy as 2006 progresses. I'm still a believer that we're going to see $2 gas before $4 gas because the contraction of the global economy that I foresee in 2007 will dramatically reduce demand for crude.

The major wild card here is the US vs. Iran. Two weeks ago, I shrugged off all the Iran talk as blustery PR, but it appears that there is some real meat to US preliminary planning. If this talk is true, the possibility of our attacking Iran goes from my forecast of 0% to 30% or 40% and that risk premium probably justifies the current price. For the record, if we attack Iran we all should start buying stock in Schwinn/Trek/Cannondale, etc because you'll be driving around the North Country begging to find $5 gas.

Here's the best gas mapping site I've seen......... Type in your zip code and get updated prices using daily price data. Pretty cool.


2) 10yr and Real Estate - A number of astute market watchers pointed out that the 10yr bond crossed an important threshold today rising above 5.13%. I'm not a technician/chart guy, but one of the best pointed out today that the 10yr is above a trend line that goes back 20 yrs. This is a really important reversal. I'm of the mind that the 10yr bond is racing back to 6% and anything above that is anyone's guess. As consistent readers will remember, the 10yr bond dictates interest rates on your mortgage. Rising 10yr rates = Rising mortgage rates = falling home prices. Couple this with exploding inventory, a buyer's strike in many markets and developments popping up on every inch of available land and this has the makings of being a very bad time to be a new home buyer.

4) Dollar - I won't bother you with a ton of statistics here, but note that the US dollar fell to a 20 yr low vs the Canadian dollar recently (BTW - Did anyone here the Calgary fans booing during our National Anthem tonight?). Oddly enough, that should be good news for our local economy as Canadians will have more incentive to travel south and spend their appreciating currency in our rundown taverns.

5) Markets - Here's the $64k question - where do the markets go from here? I'm still of the opinion that the Fed will raise rates at their next meeting before taking a break on rate hikes. This probably causes one last 200pt day on the dow. I'd sell into the teeth of that rally, because the back half of 2006 and beyond looks ugly. If I have to put a number on the Dow, I'll say we peak within 50 pts of 11,700 then we're heading back to the mid-8k range by 2008. It's Japan circa 1993...

Thoughts, comments, questions???

Any subjects you'd like clarified or covered???

Shoot me an e-mail.

Wednesday, April 26, 2006

Housing Recap - What Does a 1% jump in Mortgage Rates Mean to You?

A ton of data hit the markets this week on housing and the headline numbers made many in the "There's No Bubble" crowd cheer. There was a bit of a bounce from Feb's seasonal lows into March, but trends are not made on month to month data, but rather year over year. March existing home sales and new home sales both came in below 2005's numbers and more importantly the pricing numbers were off sharply as both the median and the average prices fell.

Today the average 30 yr fixed rate mortgage sits at about 6.5% up from 5.5% in July 2005. While this is a meaningful jump, we are still far below the 8.5% rates we saw in 2000 just 6 short years ago.

I think it's important to see what a 1% jump in interest rates does to housing affordability. Let's do some scenario analysis -

Assume that a buyer buys a home priced at the national median of $220k and puts 20% down - I know, I know, stop laughing "no one puts 20% down anymore" - just bear with me.

This $174k mortgage at 5.5% in July 2005 produced a monthly payment of just $991 and total interest over the life of the loan of $183k. Today that same loan costs $1,100/mth and produces total interest costs of $223k over the life of the loan. In order to maintain the original $991 payment at today's interest rates you would only be able to afford a $156k loan - roughly a 10% decline in the price. Not a huge swing but clearly indicative of what's happened in the market in the last 9 mths.

Where this exercise can really get entertaining is with large mortgages. Let's say someone pays $625k for a home and again (humor me) puts 20% down yielding a $500k mortgage.

At 5.5%, the monthly payment for this mortgage is $2, 850.
At 6.5%, the monthly payment for this mortgage is $3,170 ($320 increase)
At 8.25% - just 1.75% from current rates - the payment is $3,758 (a $908 increase/mth).

If interest rates were to reach 8.25% again, the price of our example home would have to be lowered $474k (again with 20% down) to equal the original monthly mortgage of $2,850. If our original buyer at $625 in July 2005, has to sell at $474, they will
  • Have lost their entire $125k down payment
  • Have zero equity in the home
  • Have to likely write a check to terminate the balance of the loan for $20k or so.
Welcome to 1991 all over again.

Ok, so I know there are not a lot of $625k homes for sale in the North Country - 14 by my count - but the impacts are meaningful if this plays out downstate or across the US. A weakening housing sector will hurt job growth, hamper tax receipts, negatively affect state funding for schools and possibly impact Federal spending on military bases like our lifeblood - Ft. Drum.

In 1997, I was beating the drum that outsourcing was coming. It took 7 years for everyone to catch on and by the time we did we were all calling Frank in Bangladesh to fix our PC. I may be early on this call, but the impact of interest rates on housing and ultimately our entire economy could be dire.

Monday, April 24, 2006

Gas Buddy Map - Note Upstate NY Prices...


Wow, this is a great mashup of geography meeting data. You can see the counties that are paying the most for gas - Including our own St. Lawrence County at $3.19/gal and those that are dishing out a mere $2.37/gal like those lucky @**#$ in Wyoming.

Since my days on Wall St. I've always been a bit of a chart/data geek and this one is a home run. Kudos to the brains behind Gas Buddy.

As a reminder - Congress is getting ready to call hearings, blah, blah, blah. By the time they start their hearings you'll be back to paying $2.50/gallon (not great but better). So while calling for hearings makes great news and puts you on the side of the little guy vs. the Big Bad oil companies remember the heart of this problem lies with

  • Speculators pushing the market up over unrest in Nigeria and potential problems with Iran
  • Refining capacity which was constrained by maintenance schedules. Normal maintenance schedules at refineries were delayed by Katrina.
  • Anticipation of the summer driving season
  • Supply/Demand constraints - but frankly that only justifies oil at $55-$60 everything above that is due to the factors noted above IMHO.
Keep this in mind - Oil companies are like Donald Trump, they don't know when to say when. Trump has overbuilt into the teeth of this housing boom and the oil companies will over drill and bring too much supply online in the next couple of years pushing prices back down to earth. It's why commodities are called CYCLICAL stocks not growth stocks :)

Be on the lookout for NNYDEALS - coming soon....

Sunday, April 23, 2006

Gas & Oil Part III

I found it very interesting to read over the weekend that many have come around to my way of thinking on Gas and Oil.

A quote for an analyst on CNN tonight - "many of us don't like to hear it, but we are likely the greatest single reason for the surge in oil and gas. Our reluctance to buy more fuel efficient vehicles and/or change our driving habits is a major factor in the demand side of the equation"

A quote from a Boston.com article on Saturday - "the traders are pushing this market higher now. Any little ripple in the market is sparking waves of buying as speculators move in".

For what it's worth all of my hedge fund contacts are obsessed with commodities right now. All they trade is gold, oil, copper or zinc. That's not healthy for these markets.

Oil and gas should ease a bit in the upcoming week but it might not make much of a difference at the pump. If it makes you feel any better I do have a scenario for cheaper gas in 2008-2010.

1) Major oil companies are drilling like mad right now and they will bring online lots of new supply over the next 2-5 yrs. More supply = lower prices

2) The double whammy of real estate slowdown and rising interest rates is going to severely crimp growth in the US economy. Weaker US economy = lower prices

3) A slowdown of our economy will reduce manufacturing output and economic growth in China and the rest of the Asian developing world. Reduced economic activity in Asia = lower prices.


Unfortunately, we need our economy to cool (and cool pretty dramatically) before these effects will be felt at the pump, but I'd say with some confidence that we'll be paying less than $2/gallon again by 2009.

You might want to invest in a high quality bike just in case I'm wrong :)

Tired of the steady stream of negative news...

"Another DWI to report - John Q Public was arrested last night and charged with blah, blah, blah....."

Do you ever get the sense that if the police scanner shutdown, your local news report would be 30 minutes of terrifying weather forecasts ("It could be 58 and breezy tomorrow so do not, under any circumstances, attempt to travel in Jefferson county").

Well I found this website over the weekend and thus far it's been a nice change of pace. No news of car chases or Bird flu chasing us around the globe. The Great News Network (GNN) is boldly going where no traditional ratings driven network news can go - to report uplifting, real stories of progress being made (or at least attempted) around the US.

What will Johnny be when he grows up?

It's looking increasingly less likely that Johnny or Suzie will grow up to be an engineer if they are a student in the US.

Why is this important? It is difficult to quantify but as our nation has shifted it's focus from manufacturing to a service economy we have also sacrificed some of our ability to truly innovate. Much of our greatest innovations of the past 100 yrs were direct results of our fascination with science and engineering. We have become a nation of speculators trading financial assets (now it's flipping houses, in 1999 it was day-trading Cisco) while the rest of the world innovates.

I've witnessed this trend occurring for more than 15 years, but there is a critical difference now. Today a talented engineer in India or China may not aspire to come to the US to live the American dream. Many are still struggling through our various immigration hurdles to come to the land of the free, but for many the argument for emigrating is simply not that compelling. Many of the best and brightest will elect to stay at home in 2006-2020 and this lack of imported talent may have tragic consequences on the US economy. The best defense? Push math and science as early and as often as you can with your children.

From a recent presentation by Robert Herbold - former COO, Microsoft - courtesy of VC Confidential.

"If one is to believe that a country's long-term prosperity and growth is tied to the strength of its innovation and science, the US is in increasing trouble. I fear that we will not begin to take things seriously until we are fairly down the declining path. Marc Faber presented two interesting tables from Robert Herbold (former COO, Microsoft).

BS/BA Degrees BS Engineering %Degrees

(000's) (000's) Engineering
  1. US 1,253.0 59.5 5%
  2. China 567.9 219.6 39%
  3. S. Korea 209.7 56.5 27%
  4. Taiwan 117.4 26.6 23%
  5. Japan 542.3 104.5 19%
I'm not particularly concerned with the raw numbers - China has a population 3x ours so to see their educational system producing 3+ times our number of engineers is not too unsettling.

However, the percentages are really disconcerting, only 5% of our students graduate with engineering degrees???? Why are we paying $35k/yr in tuition? To produce some more real estate agents, attorneys and financial planners? Just my 0.02.....